Drug Wholesaler McKesson to Buy HBO & Co.
McKesson Corp. on Sunday said it would buy HBO & Co., the largest maker of software for the health-care industry, for $14 billion in stock, accelerating the No. 1 U.S. drug wholesaler’s expansion into information services.
The acquisition will help San Francisco-based McKesson stay a step ahead of its largest competitor, Cardinal Health Inc., which this month said it would buy Allegiance Corp., a distributor of medical equipment and provider of cost management services, for $5 billion.
Acquiring HBO would boost McKesson’s presence in the information services business, an area with higher profit margins than drug reselling. It would also allow the company to grow rapidly after federal regulators this summer forced it to drop plans to acquire the fourth-largest drug wholesaler, AmeriSource Health Corp.
“This continues McKesson’s efforts of getting into higher-margin, higher-value-added services,” said Victor Mandel, a Goldman, Sachs & Co. analyst. “It is exactly where they want to be moving.”
McKesson said it will issue about 163 million new shares, exchanging 0.37 McKesson share for each share of HBO. That represents a premium for HBO of 11% based on Friday’s closing price of $29.56.
Atlanta-based HBO specializes in selling software to doctors, hospitals and other health-care providers, though it isn’t strong in software for pharmacies. McKesson already provides software and robot systems that help hospitals and pharmacies manage drug inventories and costs.
The combination would allow the two to use existing sales forces to promote products now marketed by each, McKesson Chief Executive Mark A. Pulido said in an interview.
The increase in revenue, along with some cost cutting, should help enable the new company to boost earnings by $75 million, or about 1% to 2% above what the two would have earned had they remained independent. Within three years, similar efforts would deliver $150 million in additional earnings per year, the companies said.
“We do not have an integration challenge before us because we are focused in different business lines,” said Pulido, who will be chief executive of the new company. “What we have is the opportunity to accelerate growth.”
In the 12 months ended Sept. 30, the combined company would have had revenue of $21.2 billion and earnings before interest and taxes of $886 million, McKesson said. The new company will be the world’s top supplier of services to the health-care industry, the company added.
The two have a combined customer base of 5,000 hospitals, 25,000 retail pharmacies, 35,000 physician practices, 10,000 extended care sites, 600 payors, 450 drug makers and 2,000 medical-surgical manufacturers.
The announcement follows a merger attempt between the two that fell apart in July after Salomon Smith Barney Inc. prematurely told its brokers about the transaction. After word leaked out, shares of HBO fell, disrupting the structure of the transaction.
After the acquisition, the resulting company will be called McKesson HBOC and will be based in San Francisco. Its chairman will be HBO Chairman and Chief Executive Charles W. McCall.
