From briefing.com <<WebMD Merger Thoughts
It is just plain hard to believe that a company with a market capitalization of $5 billion would merge on a 50/50 basis with a company that has only $75,000 in revenue.
Yesterday, WebMD (WBMD) and Healtheon confirmed that they are in talks to merge both companies. The Wall Street Journal reported that the terms are a 50/50 merger. Since Healtheon's market capitalization is $5 billion, this "values" WebMD, only on the web for six months, and with revenues of just $75,000 in nine months, at the same $5 billion. Jeffrey Arnold, the 29 year old Chairman and CEO of WebMD, has made an incredible deal.
So why did HLTH stock rise 24 3/8 points to $80 1/4 on the news?
What is going on? How can WebMD be so valuable?
An Information Business Model
As we mentioned in our Stock Briefs of Monday and Wednesday, Briefing.com believes that information business models are the true innovations of the internet. These are business where the entire transaction occurs over the internet, with both request and delivery initiated and controlled by the user. With the "product" being electronic information, there is no "cost-of-goods-sold." It is an extremely leveraged business model which has never really existed before.
The health industry is one of the most logical applications of an information business model. First of all, everyone, eventually at least, has health problems. Secondly, it is one of the largest industries in America, and growing rapidly.
What you see of WebMD on the net is the ability to compare symptoms with a disease. Is this cold or flu? But WebMD is much much more than just consumer research.
WebMD
The medical profession is a huge consumer of information and generator of transactions. Every hospital has its own proprietary network with billing, procedure administration, as well as all of the IT needs of a large company. Some hospitals have automated medical records. And there are thousands of independent doctors.
WebMD intends to provide a completely automated system for professionals and hospitals, incorporating the internet. Here is a list of the basic services that WebMD provides, either through a $29 or $99 subscription service, for professionals.
Internet based insurance eligibility checking
Virtual receptionist: manages incoming calls, faxes, emails, and pages
Customized web site for the physician subscriber
Inclusion in the referral service that consumers will use
Interactive "dissectible anatomy software" (Do practicing doctors need this? Hope not!)
Secure email services
Consumer access to medical information is all free, which is intended to drive consumers to the referral section of the site.
By itself, it doesn't seem like a lot. But integrate Healtheon's insurance processing system, and suddenly, it looks like the nucleus of a nationwide integrated physician's network.
Healtheon
Healtheon's business plan originally was meant to automate the processing of insurance claims. Instead of collecting together a huge pile of bills and submitting them to your insurer, Healtheon's plan was to completely automate the processing of insurance payments over the internet. You could get an electronic bill from the hospital, electronically submit it, and monitor its payment process.
But while the company has made some progress, it hasn't come booming out of the gate like some other internet companies. It is the kind of business which needs a critical mass to really take off.
Healtheon announced intentions to acquire MedE America (MEDE) last month, an electronic payments processing company of roughly equivalent size, but not yet on the internet.
Merging Healtheon with the MedE services and with WebMD may give Healtheon the critical mass they need.
Not only will they have an information model, selling subscriptions to doctors, but they will have a transactional model processing claims for a fee.
Possible Plays on Healtheon
So how can you play the emergence of the new automated medical information world? You can't buy WebMD, they withdrew their IPO. Here are some thoughts.
GO LONG HEALTHEON: The market obviously seems to think that this is the direction, as Healtheon rose 43% on Wednesday. Frankly, this is a bit baffling. Although merging with WebMD is a very positive move for their business, it almost completely confirms that their current direction is not strong enough. They are basically merging with a "concept." The first logical deduction would be that Healtheon's current line of business does not deserve a Price/Sales ratio of 45, and should be diluted because they are merging as equals with a company that hasn't got any revenue, but has bigger losses than Healtheon. Does anyone even remember the phrase "accretive to earnings?" Just not relevant here.
Fundamental logic simply isn't at work with Healtheon investors. Going long Healtheon at this point ($80 a share) is more of a play on the emotions of the investing public, who aren't taking the time to do fundamental analysis. That's okay for a short-term trade, but not for an investment. We'd advise just passing on any long term position on Healtheon at these prices. Reexamine it after the merger.
SHORT HEALTHEON: This play should be avoided. Normally, if buying is bad, then shorting must be good. But any such short would be based upon a fundamental analysis, which is not driving Healtheon right now. The vision is of a single dominant healthcare information system, eventually encompassing everything from consumer inquiries and drug sales to payments. The emotional aspect is just too strong to predict for an investment.
Side Bets
So how can you be involved? Side bets are the best. Here are three possible related plays, and one upcoming IPO to watch.
Premier Technologies (PTEK): Premier was an initial investor in WebMD and now owns 12.1% of WebMD. Since WebMD is supposedly equal in value to Healtheon, the value of PTEK's 12.1% should be more than $650 million (0.12 * 5.6 billion). Since PTEK has 47 million shares, this represents about $13.80 per share. Cary Retlin, an analyst at Whale Securities Co., estimates the value of PTEK's ongoing business at $12 per share. We haven't done enough research on PTEK to verify this estimate yet, but if you accept it, and believe the WebMD deal will be 50/50, then PTEK's real value will be closer to $25 a share. PTEK closed yesterday at $16 5/16.
MedE America (MEDE) Healtheon is in the process of merging with MEDE. This deal calls for a conversion of 0.6593 shares of HLTH for every share of MEDE, with an upper limit of $42 a share. The upper limit was set by a clause which stated that if HLTH exceeded $63.70 a share on the date of the shareholders meeting for approval, the exchange ratio would be equal to HLTH share price divided by $42 a share. Since the shareholders meeting must be no later than the second week of June, HLTH needs to stay above $63 a share in order to secure a $42 conversion ratio for MedE. MedE closed yesterday at $32 3/8, up 5 1/2.
DrKoop.com (KOOP). Still in the registration stage, this company, which has the renowned former US Surgeon General C. Everett Koop as chairman, is planning to go public in June. Shares of this company, if you can get them, are likely to be hot. Since so much of the internet stock market is a "keep-up-with-the-jones" type of atmosphere, speculation is that DrKoop.com will not long stay independent. Both America Online (AOL) and Yahoo (YHOO) are likely to seek alliances with, or actually acquire, DrKoop.com.
Superior Consultants Holding (SUPC). This company has a 14% stake in DrKoop. Even at the modest IPO market capitalization of $250 million for DrKoop, this represents a stake of $35 million for SUPC, or about $3.50 a share. But if DrKoop becomes an acquisition target for portals like Yahoo and America Online, its market capitalization could be much higher. At $1 billion, it means $14 a share for SUPC. If DrKoop.com were valued equally to WebMD, (hard to believe, but so is the WebMD deal), then SUPC's stake would be $60 a share. SUPC closed yesterday at $32 1/8.
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