The battle for control of American Hospital Supply Corp. moved from rhetoric to retaliation yesterday when Hospital Corp. of America, the nation's largest for-profit hospital chain, flexed its financial muscles by canceling nearly $100 million of planned purchases of intravenous solutions from Baxter Travenol Laboratories Inc.
HCA also threatened to cancel more than $1 billion of purchases from American over the next three years if Baxter acquires control of the company. Both moves are designed to force Baxter to drop its unsolicited $50-a-share bid for control of American, which has derailed HCA's plan to acquire American for about $36 a share.
"Even after HCA and American Hospital Supply Corp., itself a major high-quality supplier of intravenous solutions, had entered into binding merger documents . . . HCA had planned to continue its intravenous purchase agreement with Baxter Travenol until the December 1987 normal termination," said Thomas F. Frist Jr., HCA president and chief executive officer. "However, Baxter Travenol's intervention in HCA's pending combination with American has caused us to have serious questions concerning the legality and ethics of Baxter's conduct. As a result, we have concluded that it is in HCA's best interest to terminate this supply agreement with Baxter Travenol."
Frist's aggressive actions were designed not only to threaten Baxter's current sales, but also its future revenue if the company gains control of American. Frist said HCA has a three-year commitment to buy a minimum of $325 million a year in products and services from American but has the option to cancel that agreement if any person or entity, including Baxter, acquires 35 percent or more of the company.
"If Baxter Travenol continues to pursue American, they are throwing away more than $1 billion of aggregate purchase commitments from HCA's hospitals and, of course, significant potential for future business with HCA," Frist said.
Baxter President Vernon R. Loucks Jr. said he expected HCA's action because the giant hospital chain is trying to pursue a merger with American. He said he was disappointed that the action will deprive HCA of a competitive-bid arrangement that would have provided top-quality products at low costs. He also said he is confident that, once the emotional climate of the takeover battle has passed, the companies will resume doing business.
Baxter is offering $50 a share in cash for half of American's outstanding common stock and $50 a share in Baxter stock for the other half. Under terms of the proposed merger between HCA and American, each American share would be converted into three-fourths of a share of a new holding company that would own HCA and American, making the offer worth about $36 a share to American stockholders.
American, which has been critical of Baxter's takeover bid, plans to hold a special board meeting Friday to consider Baxter's latest proposal. American has said it believes a merger with HCA is in the company's best long-run interest and also has said it does not believe Baxter's bid is really worth $50 a share. But a lack of shareholder support has forced American and HCA to postpone shareholder votes on the deal indefinitely.
Baxter, the smallest of the three companies, had revenue of $1.8 billion and net income of $29.1 million last year. HCA had revenue of $4.2 billion and net income of $296.8 million, while American, the nation's largest supplier of hospital products, had revenue of $3.5 billion and net income of $237.8 million.
HCA has said it would realize significant cost savings by acquiring American. But many hospitals have made it clear that they oppose the proposed merger, primarily because they do not wish to buy supplies from HCA, with whose hospitals they compete.
One organization that opposes the proposed merger of HCA and American is the American Health Care System, the nation' second-largest network of not-for-profit hospitals. The association, which represents hospitals with combined revenue of $7 billion, sent a telegram yesterday to Baxter, urging the company not to drop its bid as a result of HCA's aggressive action.
"I am disturbed to learn that HCA has served notice of its intent to terminate its contract to purchase intravenous products from Baxter Travenol," said the telegram from Charles Ewell, president of American Health Care Systems. "Presumably, this is in retaliation for Baxter Travenol's offer to purchase American Hospital Supply for $50 per share. I want you to know that American Health Care Systems supports Baxter Travenol's initiative because we believe it can result in a strong and independent source of supply for all hospital and health care providers.
"Since HCA controls less than 3 percent of the hospital market, and we in the not-for-profit sector control 85 percent of the market, I feel sure that the good will Baxter Travenol is generating among not-for-profit hospitals will in the long run more than compensate for the loss of HCA's business. We believe in what you are trying to accomplish and we deplore any efforts to coerce you into abandoning your offer," the telegram said.