Baxter Travenol Laboratories Inc. made a surprise bid of more than $3.5 billion yesterday for American Hospital Supply Co., a company that earlier this year agreed to be acquired by Hospital Corp. of America.
The bid shocked officials of American and HCA, as well as Wall Street analysts. Stockholders of American, which is the nation's largest provider of hospital supplies, and HCA, which is the nation's largest for-profit hospital chain, have not yet approved their proposed merger. They are scheduled to vote on it July 3. Baxter, best known for supplying hospitals with intravenous solutions, said its bid would remain open until July 5.
"Everyone was caught by surprise," said Joel Ray, director of research at J. C. Bradford.
Baxter is offering $50 a share in cash for half of American's shares and 3.01 shares of Baxter stock for each of the rest. Baxter would have to issue 168 million new shares of stock in the merger, which is 115 percent of the number of Baxter shares currently outstanding.
Baxter had revenue last year of $1.8 billion compared with American's $3.5 billion.
Certain agreements that already exist between HCA and American could increase the cost of the acquisition for Baxter. For example, the companies have an agreement that if another company, such as Baxter, makes a bid for American, American would issue and deliver to HCA 39 million of its shares in exchange for 29.5 million newly issued HCA shares.
Under the terms of the proposed merger between HCA and American, each American share would be converted into three-quarters of a share of a new holding company that would own HCA and American. Each HCA share would represent one share of the new holding company's stock.
Despite delays in trading prior to the Baxter announcement, American and HCA were heavily traded yesterday. American closed up 2 5/8 at 37, as 1.46 million shares changed hands, while HCA closed up 1 3/8 at 48, on a volume of 1.48 million shares. Baxter closed down 3/4 at 15 7/8, on a volume of 966,700 shares.
"I just don't see the benefit from consolidation of Baxter and American," said Duff & Phelps analyst Bonnie Cook. "Baxter Travenol has been trying to diversify outside the industry as hospital admissions continue to decline and there is pricing pressure. Combining with American pushes the company right back into the hospital market. It would entrench them in that market. I'm surprised they would want to bid for American Hospital Supply."
Cook said Baxter derives about half of its profits from the sale of intravenous solutions to hospitals. The company also is a major provider of kidney dialysis and blood therapy products. It has been expanding into the home health care and hospital information systems markets, she said.
Some Wall Street analysts have said the proposed combination of American and HCA makes financial and strategic sense for both companies, given the changing economics of the health-care field. In an era when the government is trying to hold down medical costs by replacing the old Medicare cost-plus reimbursement system with fixed-fee schedules, and employer-provided insurance programs are trying to hold down costs by discouraging long hosptial stays and expensive procedures, the profitable survivors in the hospital management field will be companies that control their operating expenses.
By acquiring American, which distributes more than 130,000 medical products, HCA should be able to cut its operating expenses by reducing its supply costs.