Healtheon, WebMD, With Big Backers,
To Merge in Deal Valued at $5.5 Billion
By STEVEN LIPIN and KARA SWISHER
Staff Reporters of THE WALL STREET JOURNAL
Healtheon Corp. and WebMD Inc. are expected to announce a stock-swap merger valued at roughly $5.5 billion that will include major investments by a well-known group of strategic partners, including Microsoft Corp., Excite Inc. and Intel Corp.
The deal is an attempt to create the dominant Web-based health-care site linking both doctors and patients as well as a range of e-commerce opportunities. Health, like finance and travel, is considered one of the hot spots on the Internet, with no player dominating yet. There are several sites devoted to selling pharmacy goods -- including one backed by Amazon.com Inc. called Drugstore.com Inc. -- and a wide range of health-content sites.
Healtheon's board has already approved the merger, and WebMD's board is scheduled to vote Wednesday morning, according to people familiar with the matter. The deal will be structured as a merger, with both sides owning 50% of the combined company. Because Healtheon has a market value of $5.5 billion on a fully diluted basis, WebMD in effect will be valued at the same price -- at least before Healtheon stock moves.
Healtheon, which went public in February, closed Tuesday at $55.875 a share, down $1, on the Nasdaq Stock Market. Talk of the merger last Friday sent Healtheon's shares up 21%. WebMD (webmd.com) is closely held and was expected to be taken public this month but decided against the move to pursue a different strategy.
Among the backers are Microsoft, Excite and Intel, people familiar with the matter said. Together, strategic investors will invest about $500 million in either WebMD or the combined company before the merger closes. Excite, a major Web portal that is about to be acquired by At Home Corp., will invest $20 million to $30 million in WebMD prior to the merger's closing. In return, WebMD is expected to buy $60 million in advertising from Excite.
WebMD is expected to be the exclusive health-care content provider to Excite, Microsoft's MSN and Lycos Inc., giving WebMD the potential for huge traffic.
Other key investors will include McKesson HBOC Inc., which is already an investor in WebMD and will invest in the combined company upon closing, said people familiar with the matter.
Michael Long, currently chief executive of Healtheon, is expected to become chairman of the combined company, said these people. Jeffrey Arnold, WebMD's chairman and chief executive, will hold the No. 2 position, they said. Jim Clark, the current chairman of Healtheon, is expected to step down as chairman and remain as a director of the combined company.
Microsoft, which is already an investor in WebMD, is expected to take a stake of a couple of hundred million dollars in the combined company before closing, these people say. In addition, UnitedHealth Group, a Minneapolis HMO that already is an investor in Healtheon, has been discussing taking a stake in WebMD as well. Intel's investment is expected to be relatively minor, but it wants to insure it has a relationship with the combined company if it becomes the new standard for online-health services.
Left out are Yahoo! Inc. and America Online Inc., both of whom have no powerful health offering as yet.
The convoluted ownership of the new company is becoming increasingly typical in Internet mergers with competitors partnering and partners competing. One of Healtheon's main investors and backers has been Mr. Clark, one of the co-founders of Netscape Communications Corp. -- a rival of Microsoft.
Microsoft's MSN portal competes with that of Excite. At Home Chief Executive Thomas Jermoluk sits on the board of Healtheon, which was backed by powerful venture-capital firm Kleiner Perkins Caufield & Byers. Kleiner Perkins's L. John Doerr also sits on the Healtheon board. And AT&T Corp., which recently received a major investment from Microsoft, owns a controlling stake in At Home.
Healtheon is aimed at the back end of the online health-care equation -- conducting transactions over the Web and over a proprietary service. WebMD is a site with extensive medical information and services to both doctors and consumers.
WebMD had a loss of $7.8 million on tiny revenue of $75,000 for the first nine months of 1998. Healtheon also had a big loss, $54 million, in 1998, but had revenue of $48.8 million.
WebMD, founded by Mr. Arnold, the company's 29-year-old chief executive, started its Internet operations just last fall. The company established itself by forging alliances with other companies, in an effort to create a convenient Internet gateway for access to medical information and services for doctors and consumers.
Earlier this year, for example, the company announced an alliance with DuPont Co. under which DuPont will provide life-sciences content for the Web site, and will underwrite doctors' subscriptions to WebMD. The consumer portion of the Web site is free.
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