H.I.S.-tory by Vince Ciotti

© 2014 by H.I.S. Professionals, LLC, all rights reserved.

Episode #120:

McKesson Part 8 =

The Deal!

+ =

Deals to Date • Below is a visual recap of the dozens of HBOC deals to date:

The Biggest Deal in HIS-tory!• We’ve covered scores of mergers & acquisitions (M & As) during

these 100+ HIS-tory episodes, but the next one involving HBOC was easily the biggest & “baddest” acquisition in our industry.

• Some of the other big M & As include:- Siemens acquiring SMS for ≈$2.1B- Allscripts buying Eclipsys for $1.35B- NTT Data acquiring Keane for $1.2B- GE buying IDX for $1.2B

• Indeed, HBOC had already spent a ton:- CliniCom came in about $190M- FDC (Amex/SAI/Mac) cost $125M- IBAX was a bargain at only $45M…

• So the $14.5B deal between McKesson and HBOC set a hew high in financial terms, and a new low in moral & human terms…

Role Reversal• As an indication of just how big HBOC’s appetite for acquisitions

had become by 1998, in July of that year, the two firms began discussion of a potential deal that would have seen HBOC (annual revenue of ≈$1.5B) acquiring McKesson (≈$20B in revenue)!?

• Word of that deal leaked out ending the talks, causing HBOC’s stock to tank 22% in 2 days. HBOC’s weakened stock price caused the roles to be reversed in subsequent talks, which this time were kept under wraps.

• The companies announced their definitive “merger” agreement on Oct. 18 under which Charlie McCall would become Chairman of the new McKesson/HBOC, with McKesson’s Mark Pulido as the the President & CEO.

Birth of an HIS Giant• The combined firms had an

enormous client base:– HBOC had 2,800 hospitals on

its many diverse systems– McKesson sold drugs &

supplies to over 2,200 US hospitals.

• The two also sold to 25,000 retail pharmacies, 35,000 physician practices, 10,000 extended care sites, 600 payors, 450 drug manufacturers and 2,000 medical-surgical manufacturers

• It truly was an industry facelift:

The Unraveling Begins• Initial reaction from Wall Street was surprisingly cool, with

HBOC’s stock off 3.5 on NASDAQ, down to 26 & 1/8, while McKesson’s remained flat at 88 & 11/16 on the Big Board. Meh…

• In April, 1999, a routine audit turned up major problems - see right:

• When word leaked that McKesson/HBOC had to reinstate earnings, its stock plummeted 50%...

• And just who had been HBOC’s audit firm? • Just think Enron A

A little bit later…

Armageddon• This sad series of images recounts

McKesson/HBOC’s downward spiral over the next year:

Armageddon, cont’d• And the headlines kept getting worse:

Unique?• It’s sad how little we remember of past history… Scandals such as

McKesson/HBOC’s shock us to the core, then are forgotten in a nanosecond as the next news/tweets/likes hits our screens.

• Remember “HIS Insider” that tried to go on-line years ago, before the era of interactive blogs like Mr. HIS-Talk’s?

• They pointed out in this piece a number of 2003 lawsuits, as almost every vendor out there has been enmeshed in some sort of scandal over it HIS-tory…

• McKesson/HBOC was just the largest and got caught!

Takeaway?• It’s a little hard to make light of such a sad turn of events, but

there is one interesting way to look at the McK/HBOC scandal.• Ever heard from tech friends in other industries how “behind”

healthcare is compared to others? Well, tell them about this:• Next time you hear how behind we are,

point out to your non-healthcare friend how our industry beat the whole country to the punch when it comes to accounting scandals: the 1999 McK/HBOC debacle predated Enron in 2001 by a full 2 years, and even involved the same audit firm!

• Another interesting perspective: most vendors’ fiscal year end is New Years eve, except a few: like Siemens = 9/30. McKesson’s is March 30, so their fiscal year starts on April Fools Day…