Health Systems May Be Left With No Suitor : Mergers: Analysts say withdrawal of FHP offer may intensify pressure to satisfy Woodland Hills company's investors.


Health Systems International, which four days ago had two buyers waiting in the wings, now may have none after FHP International withdrew its $1.69-billion offer Thursday for the Woodland Hills-based health care company.

FHP's announcement that it was dropping its $34-a-share proposal for Health Systems surprised Wall Street, which had been betting that a deal would be struck. Health Systems' stock tumbled $4 to $25.25, down 14% from Wednesday's close, in New York Stock Exchange trading.

Health Systems, which operates California's second-largest health maintenance organization, Health Net, appeared to rebuff bids by FHP and Foundation Health Corp. by insisting it was not for sale. On Monday, Foundation dropped its $31.15-a-share, or $1.55-billion, stock offer.

But if Health Systems management wanted to be left alone, the withdrawal of the two offers hardly guarantees that, analysts said. Instead, it may intensify pressure on Health Systems to satisfy disgruntled investors, analysts said.

"This outcome is very unfortunate for shareholders," said Todd Richter, a Dean Witter Reynolds analyst. "It very clearly puts management under the microscope. They are going to be tainted as managers who, in an industry where consolidation is considered to be favorable, may have shunned a seemingly sound consolidation."

Analysts predicted that Health Systems could be hit with shareholder lawsuits over the FHP and Foundation proposals. Shares of Health Systems rose nearly 40% when the two preliminary proposals were disclosed Dec. 30.

Already, Health Systems faces a lawsuit from a charitable foundation that owns 52% of the Woodland Hills firm. The California Wellness Foundation, in a suit filed last month, accused Health Systems of impeding the public sale of 8 million Health Systems shares.

Edward Keaney, an analyst with Volpe, Welty & Co., said the Wellness Foundation is likely to be unhappy about the withdrawal of the FHP and Foundation Health offers. Wellness Foundation officials could not be reached for comment.

There has been speculation on Wall Street that Health Systems co-chairmen Roger F. Greaves and Malik M. Hasan had a strong difference of opinion on the merits of the FHP and Foundation offers. Health Systems, which was co-founded by Greaves, was formed last year by the merger of Health Net and Colorado-based QualMed Inc., a managed care company founded by Hasan.

"There clearly is a difference of opinion between the two sides of management at Health Systems," Richter said. "Roger (Greaves) is probably more of the strategic thinker who could recognize the benefits of the proposals by the two interested parties or other parties. I think Malik Hasan is probably less interested in a merger."

Hasan said there was "unanimity" among a five-member special committee of Health Systems directors that considered the FHP and Foundation proposals. The committee was made up of Hasan, Greaves and three outside directors.

"I'm not holding (a deal) up," Hasan said. "This certainly was not a proposal that was a knockout proposal that you look at and say, 'Happy days are here again.' "

In a terse statement, FHP said its offer was withdrawn because FHP officials "determined that it was not in the best interest of FHP and its shareholders at this time."

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