PacifiCare Stock Soars on Rumors of Possible Sale

In a tumultuous series of moves, the president of PacifiCare Health Systems resigned Thursday and was replaced by the company’s chairman, while a key director said the board had hired a financial advisor to explore a possible sale of the company or other alternatives.

The events left analysts baffled, though shares of the company soared on rumors of a possible sale. Sources close to the company said there are deep divisions among top executives over the company’s direction.

To further compound the confused day, the company also announced it was acquiring a failing health-maintenance organization in Texas and was repurchasing 12 million shares of its stock, about 28% of the 43.5 million shares outstanding. The company’s shares have lost close to half their value this year.

One of PacifiCare’s most powerful shareholders and board members, Jack Anderson, was quoted by Bloomberg News as saying that the board had hired financial advisor Warburg Dillon Read and would consider selling the company, along with other alternatives aimed at boosting flagging stock prices.

Largely on the strength of Anderson’s reported comments, analysts said, PacifiCare stock surged $8.50, or 19%, to close at $54.19 on Nasdaq.

Meanwhile, Chief Executive Alan Hoops gave up chairmanship of the company Thursday to become its president, replacing Jeffrey Folick, who is stepping down to become a vice president. Hoops said that although the company would consider a sale along with other options, such a move was not imminent. The board named director David Reed its new chairman.

“To a degree, any public company is always for sale,” Hoops remarked. For PacifiCare, he said, the idea of a sale “fits in the future” as an option, but no more than any other possible course.

Anderson could not be reached for comment. Previously, the outspoken investor, whose family owns about 600,000 PacifiCare shares, had been an active player in the sales of the health maintenance organizations TakeCare and FHP.

“It looks unbelievably disjointed to me as an outside observer,” said Todd Richter, health-care analyst for Banc of America Securities’ Montgomery division in New York. “You’ve got one of the board members saying that an investment banking firm has been hired to explore selling the company, and the new chairman of the board saying it’s not the case. Then you’ve got the chief operating officer demoted and the chief executive officer--I don’t know if he’s been promoted or demoted.”

Sheryl Skolnick, a managing director of investment banking firm BancBoston Robertson Stephens, said the rise in the company’s stock price could be attributed at least in part to quotes from Anderson that the company might be sold.

But Skolnick said it is unlikely the company could be divested quickly--and questioned whether it was really for sale.

Potential purchasers, she said, would be leery about the company’s announcement Thursday that it intends to buy troubled Harris Methodist Health Plan of Arlington, Texas. By PacifiCare’s own reckoning, the health maintenance organization would not return to profitability until at least 2001.

In addition, she said, the company is built on a model of managed care that many in the industry believe is falling out of favor. Under that model, called capitation, doctors are paid a set fee each month, out of which they must pay for all aspects of patient care. That model is widely believed to be responsible for much of the financial trouble roiling physician groups in California.

Richter said that PacifiCare faces an uncertain path, whether or not it is sold.

The company, whose Secure Horizons health plan is the leading Medicare HMO, is deeply invested in the Medicare business, which investors regard as extremely risky, Richter said. In addition, Richter said, the company is a defendant in several class-action lawsuits, which accuse it of failing to live up to promises to properly take care of patients.