The Wall Street Journal Interactive Edition -- October 22, 1998
HBO-McKesson Merger Plan
Is Sparking Some Questions
By ANITA SHARPE
Staff Reporter of THE WALL STREET JOURNAL
ATLANTA -- HBO & Co.'s chief executive, Charles McCall, has spent
years patiently explaining that he runs a health-care software company, not a
cable-television network.
The questions he has been fielding since Sunday's announcement of HBO's
proposed merger with McKesson Corp. have been even more nettlesome.
Wall Street wants to know why HBO, widely considered one of the
best-positioned companies in the health-care-information field, wants to sell
out to a drug distributor.
Tracking HBO & Co.
Vital Statistics
Chief Executive
Charles McCall
1997 Revenue
$1.2 billion
1997 Profit*
$200 million
Employees
6,286
Shares outstanding
441.8 million
Business
Provides software and information services to
hospitals, physician offices, home health providers,
pharmacies, managed-care companies and insurers.
*Before one-time charges
And why, many wonder, would the company sell for the equivalent of about
$28 a share, a scant premium over its recent trading price and a sharp
discount to its 52-week high of more than $38 a share?
McKesson, based in San Francisco, agreed to acquire HBO in a stock
transaction valued at about $12 billion. HBO shareholders would receive
0.37 share of McKesson stock for each of their HBO shares. The combined
company is to be called McKesson HBOC, finally putting to rest those
questions about cable TV. Mr. McCall is to serve as chairman while Mark
Pulido, McKesson's president and chief executive, would hold those same
positions at the new entity.
Shared Customer Base
HBO and McKesson officials contend that the merger will allow the
combined entities to sell each other's products to their shared customer
base. "Our customers spend their money on sets of solutions and drugs,"
Mr. McCall said in an interview. A hospital, for instance, could use an HBO
patient-scheduling system to signal that a patient is getting a bypass
operation on a certain day and will need certain drugs following the
procedure. The system could help direct the supply of pharmaceuticals and,
Mr. McCall says, "You can minimize inventory."
Still, many analysts and health-care
consultants aren't buying the
explanations. At least four brokerage
firms have cut their ratings on HBO
since Sunday's merger announcement,
saying they fail to see many synergies
between a pharmaceutical distributor
and an information-systems supplier.
"We don't see where the synergy is
except maybe financial," said David
Whelan, health-care consultant for
Hamilton-HMC in Atlanta. "It's a
different sell; you're talking to different
people. You can't use a
complex-systems salesman to push drugs."
Genesis of HBO Name
HBO was launched in Peoria, Ill., in 1974 by three partners who had
previously created an automated financial system for a group of Midwestern
community hospitals. The corporate moniker HBO, which has confused
many investors over the years, came from the initials of the last names of the
three founders. Mr. McCall was recruited in 1991 to invigorate the business,
which had moved to Atlanta. Although Mr. McCall knew little about the
health-care industry, he had been immersed in information technology, first
with IBM Corp. as a salesman and then at CompuServe Inc., which he
eventually ran as president and chief executive.
The health-care-information arena was ripe for new products since the
medical field remains one of the least automated industries in the world.
Many hospitals and doctors offices still keep pen-and-paper patient and
payment records in manila files.
Mr. McCall set HBO on a fast-growth course, broadening its product line
beyond automation systems for hospitals to include electronic services for
physicians' offices, home health-care providers, managed-care companies
and insurers. For instance, HBO sells computer software that handles
doctors" scheduling, billing and patient records.
String of Purchases
More than 20 acquisitions since 1993 fueled the growth. As revenue grew,
operating margins fattened to about 33% in the most recent quarter. HBO's
stock-market value has swelled to more than $12 billion from $90 million in
1991 when Mr. McCall took the reins. Now, the acquisition pipeline may be
drying up, some analysts say. "You can't continue to drive up operating
margins ad infinitum," said David Francis, an analyst at Volpe Brown
Whelan in San Francisco. "I see another 12 to 18 months where you can
continue squeezing blood from that stone."
Mr. Francis speculates that Mr. McCall sized up the shrinking pool of
attractive acquisitions and determined, "the time is now" to sell.
"The law of large numbers catches up with you at some point," said Ben
Rooks, analyst with CIBC Oppenheimer Corp. In explaining the merger,
HBO officials have told Wall Street that by combining with McKesson, it
should be able to generate at least three more years of 50% annual earnings
growth instead of just one more year, Mr. Rooks says. HBO is expected to
contribute about 60% of the profits of the combined company.
Shrinking Acquisition Pool
Mr. McCall says the pool of acquisitions is indeed shrinking in some areas,
but that "there are still lots of opportunities" to buy information-service
companies. He cites HBO's September agreement to buy Access Health
Inc., a Broomfield, Colo., provider of health-care management and
information services, for more than $1 billion.
"We could add another $250 million to $300 million in acquisition revenue in
the next year," he says.
Analysts believe another big reason HBO decided to sell out now is to give
Mr. McCall liquidity and an exit strategy. Mr. McCall, who is 54 years old,
has made no secret of his desire to retire before the age of 60 and has
repeatedly told Wall Street that "men in my family don't live very long."
Earlier this year, Mr. McCall spent $3.76 million to buy an
11,000-square-foot Mediterranean-style waterfront home in Fort
Lauderdale, Fla. Mr. McCall has indicated that he plans to use the house,
which has a 20-person Jacuzzi and a 64-foot swimming pool, as a vacation
home.
Still, Mr. McCall says he has made a five-year commitment to HBO. Noting
that he owns 4.1 million shares of HBO stock, with options to buy another
3.6 million shares, he says, "My retirement is completely tied up in making
this combination successful."
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