Hospital Supply Firm Changes Course, OKs Merger With Baxter

In a dramatic retreat from its bid to create the nation’s largest health-care company by joining with Hospital Corp. of America, American Hospital Supply decided Monday to merge instead with Baxter Travenol Laboratories in a deal valued at $3.8 billion.

A definitive agreement between the companies was unanimously approved Monday afternoon by their boards of directors after a series of long weekend meetings, the companies said in a statement.

The agreement provides that Baxter Travenol will pay $51 per share in cash for as much as 53% of American Hospital’s stock. Each remaining share will be exchanged for a package of securities that include $25 of Baxter common stock, $16 of Baxter convertible preferred stock and $10 of Baxter preferred stock on which the dividend is adjustable. In addition, six current directors of American will join Baxter Travenol’s board.

Baxter and American, which both make and distribute intravenous supplies, agreed to pay HCA a total of $150 million on the date their merger is effective. The companies did not specify what the payment was for, but observers speculated that it was made in exchange for HCA’s not raising any objections to Monday’s merger agreement.

HCA Response

HCA--the nation’s largest for-profit hospital chain with 420 facilities--said it “is in the best interest of the company and its shareholders that HCA and American discontinue their merger plans.”

However, HCA President Thomas Frist Jr., who only weeks ago had crisscrossed the country lauding the HCA/American merger before financial analysts, expressed “disappointment that the merger of HCA and American Hospital Supply Corp. cannot proceed.”

The announcement came less than a month after Deerfield, Ill.-based Baxter was rebuffed in its first attempt to merge with American in a $3.7-billion offer because of American Hospital’s concern about possible antitrust conflicts and uncertainty about Baxter’s ability to finance its initial $50-a-share offer.

Determined to bolster its position in the troubled $20-billion-a-year hospital supply market, Baxter then redoubled its merger efforts.

Late last month, it secured a $2.5-billion credit line with a group of 21 banks led by First National Bank of Chicago and Morgan Guaranty Trust, announced that it was prepared to divest itself of about $500 million worth of business to resolve possible antitrust objections with American and sweetened its bid for American by $100 million.

American Hospital, a $3.4-billion-a-year concern that markets more than 130,000 medical products to hospitals, had been sought as a merger partner by HCA since April 1 and by Baxter since June 21.

Protests From Hospitals

Ultimately, American Hospital’s directors had second thoughts about accepting HCA’s lower offer because of the specter of shareholder lawsuits and mounting protests from purchasing directors for the nation’s more than 4,000 nonprofit hospitals, sources close to Baxter said.

American Hospital officials could not be reached for comment.

Under terms of the proposed agreement with HCA that was announced April 1, American Hospital shareholders would have received stock in a new holding company, Kuron Corp., valued at about $36.20 for each of their shares. However, that agreement hit a glitch when large institutional shareholders became angry that American Hospital’s directors voted to reject the Baxter Travenol proposal without giving shareholders an opportunity to vote.

The dissension made it difficult for American Hospital to muster the two-thirds vote required by Illinois state law to approve the merger. Sensing that the proposal would be voted down, HCA and American Hospital Supply twice delayed stockholders meetings where their agreement was to have been put to a vote.

American also felt pressured to consider Baxter’s proposal because its customers had started defecting to other supply firms out of fear that a company formed by American and HCA would exert excessive influence in the hospital supply market.

Vocal Opponent

One of the most vocal opponents of the HCA-American merger was Charles Ewell, president and chief executive of American Health Care Systems, a San Diego-based company that manages nonprofit hospitals. He had vowed to rebid tens of millions of dollars’ worth of contracts that his group had with American Hospital Supply if it went ahead with plans to combine with HCA.

“I think some people forgot about the strength of the not-for-profit hospitals,” which make up 85% of the nation’s hospitals, said Ewell, whose group last year purchased about $250 million in supplies from American Hospital and about $100 million from Baxter Travenol under a program to furnish supplies to about 900 hospitals in 40 states. “It’s a bloody nose for HCA and a creative victory for Baxter Travenol.” MERGER AT A GLANCE AMERICAN HOSPITAL SUPPLY American Hospital Supply, based in Evanston, Ill., manufactures and distributes a range of medical supplies, including intravenous solutions, surgical gowns and gloves, urological and irrigation products and products for heat and cold therapy. In millions, for years ended Dec. 31

1984 1983 1982 1981 1980 Revenue $3,449 $3,311 $2,966 $2,870 $2,340 Net Income $238 $212 $170 $147 $122 Per Share $3.23 $2.86 $2.36 $2.05 $2.02

BAXTER TRAVENOL LABORATORIES Baxter Travenol Laboratories, based in Deerfield, Ill., makes and markets medical care products--including intravenous feeding solutions and kidney dialysis equipment--and offers computerized health care information systems and management consulting for hospitals. In millions, for years ended Dec. 31

1984 1983 1982 1981 1980 Revenue $1,800 $1,843 $1,671 $1,504 $1,374 Net Income $29 $218 $187 $151 $128 Per Share* $0.20 $1.45 $1.22 $0.99 $0.85

* Fully diluted