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McKesson To Acquire HBO & Co.

October 19, 1998

NEW YORK (AP) _ Drug wholesaler McKesson Corp.’s proposed $14.1 billion purchase of health care software provider HBO & Co. sent both stocks and the value of the deal tumbling Monday as investors questioned the wisdom of the deal for both sides.

``It does not make a huge amount of strategic sense (for HBO),″ said Benjamin Rooks, an analyst with CIBC Oppenheimer. He said HBO’s consistent 50 percent earnings growth and 30 percent operating margin should have brought a considerably higher asking price than what the Mckesson offered.

``It makes you wonder what’s going on that HBO would sell out for an 11 percent premium,″ said Charles Trafton, an analyst with Adam Harkness & Hill. ``A lot of people wonder whether HBO sees something that others don’t, namely a general slow down in the health information market.″

Investors seemed to have the same concerns. McKesson closed at $76 a share on the New York Stock Exchange, down $12.68. HBO closed at $25.37, down $4.18.

The companies valued the deal at $14.1 billion when it was announced Sunday; after the close of trading Monday, the price had fallen to $12.4 billion.

HBO shareholders will receive 0.37 shares of McKesson common stock for each share of HBO stock in a tax-free exchange.

Both stocks had fallen in June when word first leaked about a possible merger. The companies then put any marriage plans on ice, hoping both stock prices would recover. Last Tuesday, McKesson again popped the question to HBO and the firms finished the deal Sunday after McKesson agreed to give HBO an equal number of seats on the new board of directors and retain HBO senior managers.

The companies’ products have little in common _ HBO sells computer software and McKesson sells surgical gloves and an automated pharmacy dispensing system.

Still, in the health care industry where companies are under intense pressure to get bigger to lower costs and improve negotiating clout, the company executives insisted their new partnership would aid investors and customers.

``The opportunity to enhance each company’s growth rate and strengthen each company’s position is compelling and better than each company could do on its own,″ Mark Pulido, McKesson’s president and chief executive officer, told analysts Monday in a joint briefing with HBO.

HBO president Charles McCall stressed McKesson would greatly improve his company’s ability to distribute software.

The new company will be called McKesson HBOC and be based in San Francisco. The deal is expected to close early next year following regulatory and shareholder approval.

Officials from HBO and McKesson played down initial investor skepticism. Hospitals and physician across the country want the companies to merge so they could buy a wider array of services from the same vendor, Pulido said.

McKesson, based in San Francisco, is the nation’s top drug wholesaler, with annual revenues of $18.1 billion. In recent years, the company has slowly expanded its role as an equipment supplier across the health industry.

HBO & Co., based in Atlanta, makes information systems that include clinical, financial, billing, physician practice and medical records software. It has annual sales of $1.2 billion.

At a time when hospitals, physician offices and other medical providers are frantically looking for ways to control costs, health information companies like HBO have grown rapidly because they offer computer systems to help those in the industry better track of spending and monitor patient care.

HBO also has gotten a boost in recent years as hospitals wrangle to find way to make sure their computer systems are ready for the year 2000.

The two companies plan to use each other’s sales force to increase sales of each other’s products. HBO mainly sells to hospitals, while Mckesson has a larger sales force going into doctor offices.

By reducing administrative and other expenses, the two companies hope to cut $75 million in expenses in the first year, and $150 million after three years.

Executives said Monday they planned no layoffs with the merger and HBO would maintain its work force in Atlanta.

Charles W. McCall, the chairman, president and chief executive of HBO & Co., will become chairman of McKesson HBOC. Mark A. Pulido, the president and chief executive of McKesson, will become president and chief executive of the new company.

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