When Epic Healthcare Group was sold to Healthtrust last year, it was either a windfall or a looting, depending on one's perspective.
The value paid by Healthtrust for the 34-hospital chain is the crux of a lawsuit. The case had been set to go to trial this week, but last-minute legal considerations resulted in a postponement until at least June.
In an industry that has been lathered with merger and acquisition frenzy, the case raises important questions about how hospital systems are valued. Because Epic's 13,000 employee-owners held a 61% stake in the company, the case is unique in deciding how that value should flow to those shareholders.
For example, an expert report filed by the plaintiff contends that Epic was worth more than it was sold for and that Columbia/HCA Healthcare Corp., rather than Epic's former employee-owners, is profiting from that now. Columbia bought Healthtrust for $5.6 billion in April.
The report by Robert Sherwin, who is a principal at Analysis Group, a Chicago-based finance consulting firm, contends that the value of Epic's "synergies" to Healthtrust was $400 million. The synergies included cost advantages from eliminating duplicative functions and the ability to develop new integrated networks. When Columbia bought Healthtrust, the value of those synergies increased another $200 million.
"As a result of the failure to aggressively shop Epic, the directors and officers caused payments to common shareholders to be reduced by between $200 million and $300 million, even ignoring the additional synergies with Columbia," Sherwin reported.
Columbia, the nation's largest for-profit healthcare provider, is in the unenviable position of defending the actions of a group of fired executives who managed Epic.
The lawsuit was filed by Vicki Anderson, a former Epic employee who tried to stop the $1 billion acquisition of Epic in May 1994 (May 9, 1994, p. 8). She claims that Epic's directors sold the company for less than it was worth in exchange for $60 million in severance and stock option payments.
A trial court issued a temporary restraining order to stop the acquisition at the time, but the two sides agreed to let the deal progress on the understanding that Anderson could sue Epic's officers and directors later. Healthtrust said it would be liable for any damages.
Anderson is suing for $500 million in damages on behalf of Epic's employee-owners.
In addition to Columbia, defendants include Epic's former chairman and chief executive officer, Kenn George; its chief financial officer, Thomas Schleck; and Epic's three other board members.
Although top executives are frequently dismissed in merger transactions, the Epic deal contained the unusual provision that all 13 top executives be terminated. In a deposi tion, George noted that "Healthtrust wouldn't buy Epic without the executives resigning."
Anderson claims that the compensation package given to those executives was excessive and deflated the price received by Epic's employee stock ownership plan. The $60 million severance package included $24 million for George.
Those payments were disclosed in the proxy sent to shareholders prior to the merger. However, Anderson claims that the proxy was "riddled with misrepresentations and concealment of material facts and a rigged vote of shareholders."
Although Epic's approximately 13,000 employee-owners were allowed to vote on the deal, their vote was token because the ESOP trustee and American Medical International had enough votes to approve the merger. Both had said they would vote for it. Epic was spun off by AMI in 1988.
In a strange twist, George denies reading the proxy statement before it was sent out, even though the cover page contains a letter to shareholders signed by him. In a sworn affidavit taken last month, George said that he "did not review any drafts of that proxy statement or in any way contribute to that proxy statement's form or content before it was disseminated to Epic's shareholders."
In addition, Epic's other directors also deny reviewing the proxy before it was mailed.
At the time of the deal, observers believed that Epic's shareholders were getting a great deal from Healthtrust. Healthtrust was paying $7 per share for a company that had never turned a profit. In its 51/2 years of existence, Epic lost $118 million.
Court records show that when Epic was formed in 1988, the ESOP's stock was valued at $10 per share, and in 1992, had dropped to $8.
Despite a push by the ESOP trustee to get $8 or more from Healthtrust, the hospital company balked, and the final sale price was $7.
Court documents in the case include minutes from a meeting four days before the Healthtrust merger was announced in which George paints a dire picture for Epic. "Kenn George said that the company would not survive, it could not borrow money, it didn't have access to equity markets or the debt markets," according to the meeting's minutes.
Smith Barney, a New York-based investment bank that rendered a fairness opinion on the price, said Epic was being sold for 7.3 times EBITDA (earnings before interest, taxes, depreciation and amortization), higher than the current average of 5.4 for hospital chains.
Despite that prediction, Epic's value was growing, the plaintiffs claim. For example, Epic's EBITDA grew to $145 million in 1993, compared with $93 million in 1989. A multiple of EBITDA is frequently used for determining a hospital system's sale price.