Major Shareholder Says PacifiCare Bungled Merger
A major shareholder of PacifiCare Health Systems Inc. accused the company Wednesday of bungling its acquisition of FHP International Inc. and called for prompt steps to increase shareholder value.
Franklin Mutual Advisers Inc., an investment firm run by the vocal Michael Price, said in a filing with the Securities and Exchange Commission that “absent aggressive and immediate action” by the company, “shareholders will continue to suffer.”
Franklin, which had been a major FHP shareholder and now owns 9.9% of PacifiCare, said the merger was “flawed in implementation rather than in concept.”
PacifiCare executives, who learned about poor-performing FHP sectors after acquiring the rival health maintenance organization, said Franklin’s criticism isn’t new.
“We disappointed shareholders in 1997, plain and simple,” said PacifiCare spokesman David K. Erickson.
Though the company’s net income of $92.3 million for the first nine months last year was more than double its pre-FHP income for the same period in 1996, it has continually failed to meet Wall Street’s expectations. In December, it said that its fourth-quarter earnings would be about half what analysts expected.
Franklin’s filing wasn’t a surprise, Erickson said. “I think Michael Price’s firm has a reputation for being very vocal and very involved as shareholders.”
Franklin also complained that the “entire HMO industry,” beset by regulatory and political issues, rising medical costs and competition, has to take “dramatic action” to enhance shareholder values.
PacifiCare stock, for instance, has steadily dropped from $85 a share in March to a two-year low of $49 on Tuesday. It gained $3.72 Wednesday to close at $52.72.
Franklin said that PacifiCare, specifically, should “promptly consider all alternatives to enhance shareholder value,” but stopped short of calling for a sale of the company.
Erickson said the company has been talking regularly with Franklin officers and other major investors. It plans to revive itself by renegotiating contracts with health care providers, repricing benefits to match expenses better and exiting certain markets.
On Monday, the company said it is dismissing 250 employees systemwide, including 80 at its Santa Ana headquarters. The staff cuts, the second round since the FHP takeover, amount to 2.6% of Pacifi-Care’s work force of 9,800.
Analysts said the latest cutback is a small step in the right direction but much more needs to be done to revive the HMO, which has 3.8 million members.
