MedPartners Shares Plunge on Failed Deal
MedPartners Inc. shares plummeted 45% on Thursday after its planned $8-billion takeover by rival PhyCor Inc. collapsed. Adding to the slide was the company’s warning of a fourth-quarter loss and speculation among some analysts that MedPartners’ financial woes could worsen.
MedPartners stock plummeted $8.17 to close at $10 on the New York Stock Exchange; PhyCor sank $1.63 to close at $24.88 on Nasdaq. MedPartners said it wrongly estimated the amount of medical claims in its Western division and is likely to report a loss of 20 to 25 cents a share in the fourth quarter. That might have prompted PhyCor’s reversal, analysts said, and doesn’t augur well for MedPartners’ prospects.
Although MedPartners officials have said the failed merger was caused by “operational and strategic differences,” some analysts were unconvinced.
Nashville-based PhyCor has a reputation as a conservatively run firm that has avoided large mergers. Birmingham, Ala.-based MedPartners, which has four times the revenue of PhyCor, has been an aggressive buyer of doctor practices. Over the last several years, it has acquired some of Southern California’s largest medical groups and clinics, including Mullikin, Friendly Hills, Talbert and some Cigna Healthcare operations.
“Heck, the significant cultural, operational and strategic differences between these two companies have been out in the open since the day this deal was announced,” Bear Stearns & Co. analyst Gary Frazier said in an advisory Thursday.
A more likely explanation for the merger’s collapse, Frazier said, is that “PhyCor discover[ed] problems either in MedPartners’ core operations” or in the firm’s accounting practices.
But Mark Wagar, MedPartners’ president and chief operating officer, said that “philosophical and operational” differences were significant enough “that we didn’t feel we could do a good job of integrating” the firms.
The merger would have joined the nation’s two largest companies that manage physician practices, bringing together about 35,000 doctors in 50 states, or 5% of the country’s doctors.
MedPartners also said it expects fourth-quarter pretax charges of $115 million for restructuring some operating units and $30 million for discontinued operations.
Wagar said the earnings shortfall “was unexpected and we didn’t become aware of the magnitude of these issues until the end of the year.” He said the company has moved quickly to get medical costs at its various groups under control “and bring our performance back into line right away.”
“MedPartners has grown very quickly and they’ve got to deal with integration issues,” said Thomas Hodapp, an analyst at BancAmerica Robertson Stephens. “There needs to be some conviction that the company has a handle on medical costs.”
Practice-management companies handle administration for doctors and represent them in contracts with health-care providers. The failed transaction amid sagging earnings underscores the difficulties health-care companies have in containing costs and pricing their services.
Health maintenance organizations such as Oxford Health Plans Inc. and PacifiCare Health Systems Inc., which pay for the services under managed-care plans, also have lost money for failing to match costs to revenue.
Although PhyCor investors and analysts were pleased the company had scuttled the acquisition, they remained concerned about earnings projections, saying they had not had much information from the company since the MedPartners acquisition was announced in October.
“Management has to show they can sustain historical growth rates, that is, 30% to 35% growth, going into next year,” said Hodapp, who rates PhyCor a “buy.”
PhyCor’s decision to consider the MedPartners acquisition raises the question of how confident it is in future growth, said Susan Robbins, an analyst at Baron Capital, which owned 57,000 PhyCor shares at the end of September.
