An internal conflict involving T2 Medical Chairman Thomas Haire and former Chief Executive Officer Joseph Allegra, M.D., sparked a series of events that prevented Dr. Allegra from buying the Alpharetta, Ga.-based home infusion company last summer, MODERN HEALTHCARE has learned.
Former T2 executives told MODERN HEALTHCARE that Dr. Allegra's investment group was literally hours away from presenting a formal bid to buy T2 for approximately $720 million, or $18 per share, last August. Instead, an unusual series of events-highlighted by an internal investigation of the company's bookkeeping practices-resulted in the group abandoning its efforts and Dr. Allegra resigning from the company (See related story, p. 20).
The results of the internal inquiry led to the restatement of T2's first- and second-quarter earnings for fiscal 1993 and prompted the Securities and Exchange Commission to launch an investigation into the matter. It also resulted in a flurry of shareholder lawsuits.
Had the deal gone through, T2 shareholders would have received about twice the $9-per-share price they were originally expected to receive as part of the four-way, $550 million Coram merger, which is expected to be completed next month (Feb. 14, p. 32). At deadline, the final per-share price had not been determined.
More importantly, the Allegra deal might have allowed the company to remain intact as an independent, privately held company-a ranking T2 executives say would have allowed the company to expand into other forms of outpatient services without relying on its controversial home infusion strategy with physicians.
In all, the unraveling of Dr. Allegra's proposed offer is a prime example of a sweet deal gone sour in the world of healthcare mergers and acquisitions. The failed deal also marked a parting of the ways between Mr. Haire and Dr. Allegra.
The deal that never was. Both Dr. Allegra and Mr. Haire declined to be interviewed for this story. However, former T2 executives, who spoke to MODERN HEALTHCARE on the condition of anonymity, said Dr. Allegra's investment group-fully financed by investment banking firms Donaldson, Lufkin & Jenrette; Kidder Peabody; and Robinson-Humphrey Co.-had communicated to Mr. Haire in May 1993 its intention to go ahead with a proposed leveraged buyout.
Executives at Robinson-Humphrey confirmed that all three firms assisted Dr. Allegra in the deal. Donaldson, Lufkin & Jenrette executives would neither confirm nor deny the firm's role. Kidder Peabody declined to comment. None of the firms would comment on the purchase price.
However, a copy of a Kidder Peabody due-diligence report dated May 1993 obtained by MODERN HEALTHCARE indicates a proposed purchase price range between $18 and $22 per share had been recommended for the deal. Executives confirmed that Dr. Allegra's group eventually settled on an $18-per-share price.
Upon receiving the news, a source close to the company said T2's board of directors hired New York investment banking firm Bear, Stearns & Co. to conduct a "fairness opinion" of the proposed purchase price-an indication that some buyout offer had been communicated.
"A fairness opinion is expressed with regard to a transaction," said Frank Lauinger, managing director of corporate finance at Dallas-based Principal Financial Securities. "There's got to be an event or transaction already taking place where (a company) would seek an outside party to formulate a fairness opinion."
Executives at Bear, Stearns confirmed that it was retained by T2's board of directors in May 1993 to provide a "financial advisory" of the buyout situation. However, executives deny conducting a fairness opinion on behalf of T2's board.
The anonymous letter. The proposed deal began to unravel last July after Mr. Haire reportedly told executives he had received an anonymous letter from a T2 employee alerting him to questionable bookkeeping practices at the company's corporate headquarters.
Although Mr. Haire declined to be interviewed, his attorney, David Aufhauser, confirmed the existence of an anonymous letter from a T2 employee in late July, which prompted Mr. Haire to order an investigation. He declined to elaborate on the contents of the letter.
T2 hired the accounting firm Deloitte & Touche and the Atlanta-based law firm Nelson, Mullins, Riley & Scarborough to oversee the internal investigation, sources said. Nelson, Mullins officials declined to comment.
After more than two weeks of interviewing managers at T2's 125 branches as well as corporate executives and examining company records, the audit unveiled what company executives called "certain accounting irregularities and errors" related to the writeoff of doubtful accounts-billings for which payment isn't fully received-during the first and second quarters of fiscal 1993.
On Aug. 12, T2 released to the public the findings of its investigation. Based on the audit's findings, the company said it should have recorded an additional $4 million to $5 million for the first and second quarters of fiscal 1993 for doubtful accounts.
As a result, T2 said it would be forced to restate its earnings downward for the first six months of 1993 to $24 million, or 60 cents per share, from $37 million, or 91 cents per share.
In a second press release also issued on Aug. 12, the company announced that Dr. Allegra had resigned as president and CEO and that T2's chief financial officer, David Hersh, would be placed on indefinite administrative leave. Mr. Hersh, who has since resigned from the company, also declined to comment for this article.
However, a former T2 executive, who spoke on the condition of anonymity, said the findings of the internal audit weren't as damning as the company made them out to be. He also questioned the wisdom of ordering and making public the internal audit.
According to the former executive, adjustments for the writeoff of doubtful accounts have occurred at several other home infusion companies during the past year and have been recorded as a one-time charge related to changes in reimbursement patterns by third-party payers.
Ironically, Curaflex Health Services and HealthInfusion-two of the three partners merging with T2 in the Coram deal-increased provisions for bad debt without restating earnings during fiscal 1993, according to company earnings reports.
HealthInfusion increased its estimate for bad debts by $4 million during its fourth quarter ended Dec. 31, 1993, while Curaflex increased its estimate of contractual allowances by $7.2 million and recorded a one-time charge of $2.8 million during the fourth quarter.
Both companies stated they were being more conservative in estimates of reimbursement from third-party payers during 1993 because of the growth of managed care. They also said the changes were part of an effort to unify their accounting practices regarding valuation of accounts receivable in anticipation of the Coram merger. However, neither company restated earnings.
The former T2 executive also noted that neither the investment banking firms performing due diligence of T2's books, nor Deloitte & Touche-the company's regular auditor-discovered the irregularities during separate evaluations before the investigation.
Immediately after restating its earnings, T2 Medical was hit with a flurry of shareholder lawsuits accusing Mr. Haire, Dr. Allegra, Mr. Hersh, Chief Operating Officer J. Lee Ledbetter, and T2 board member and Kidder Peabody Managing Director Stanley Trot-man of making false and misleading statements and inflating T2's stock price. The lawsuits were subsequently consolidated into a class-action suit, which was filed in Atlanta last August.
Not surprisingly, T2's stock price plummeted to $8 on Aug. 18, one week after the news went public. The stock price was half of what it was trading for on the New York Stock Exchange in May and a fraction of the $60-per-share range it had commanded in early 1992 (Aug. 23, 1993, p. 10).
On Sept. 8, nearly one month after announcing Dr. Allegra's resignation, T2 announced that his investment group had given up its attempt to acquire the company. On Sept. 15, T2 announced that it had brought back Tommy Carter as president and CEO. Mr. Carter, who co-founded T2 along with Mr. Haire in 1984, was president and COO from 1984 until 1989, when he retired and was replaced by Dr. Allegra.
The company had said it expected to remain independent and continue to develop its business and take advantage of available growth opportunities.
Five months later, T2 announced plans to merge with home infusion firms Curaflex, HealthInfusion and Medisys in a stock deal valued at $550 million. As part of the deal, Mr. Carter was named vice chairman of Coram, the newly formed company. Mr. Haire will have no management role in the new company.
Between August 1993 and February 1994, several senior executives resigned from T2. Currently, Dr. Allegra, Mr. Haire and several other T2 executives have been subpoenaed by the Securities and Exchange Commission as part of its ongoing investigation of the company, sources told MODERN HEALTHCARE. SEC officials declined to comment on the investigation.
Shareholders of T2, Curaflex, HealthInfusion and Medisys are expected to vote on the merger in June.