On the heels of layoffs to avoid a projected budget deficit of $30 million, New England Medical Center in Boston last week agreed to sell its interest in a healthcare software subsidiary for nearly triple that amount.
The deal, defined as a "recapitalization" by a major venture capital firm, will enrich the recently departed chief executive officer of the financially troubled medical center.
New York-based Warburg, Pincus & Co. led the recapitalization and becomes the largest shareholder of Transition Systems, a Boston-based developer of information systems that New England Medical established in 1985.
The medical center stands to make $88.6 million in the deal, said spokeswoman Joan Fallon. Other shareholders in the company include Jerome Grossman, M.D., who stepped down as chairman and CEO of the medical center in September 1995 after 16 years at the helm.
Grossman, former chairman of Transition Systems, bought 8,000 shares for $1 a share when he helped found the company. With an ownership stake of 8%, he stands to make $10 million under the deal announced last week, Fallon said.
A week earlier, New England Medical said it would eliminate 450 positions during the next two months to balance its budget by Sept. 30, the end of its fiscal year. That budget currently is $30 million in the red, Fallon said.
She said the staff reductions were in response to market pressures affecting all hospitals in the Boston area, which has been gripped by price-cutting amid aggressive competition by managed-care organizations. HMOs now control 40% of the market in Massachusetts, and industry estimates put the share of the Boston market at higher than 50%.
Transition Systems, by contrast, has benefited nationally from those same market pressures. Its software products target managed care, cost accounting and analyses of clinical practice patterns-all hot ideas in the changing healthcare delivery field.
The company said it has 700 healthcare customers in the United States and seven other countries.
"This is an investment we made 10 years ago that no one knew would become so valuable," said Fallon, commenting on the juxtaposition of the hospital's windfall and its deficit-induced layoffs. She said the money would help shore up the medical center's finances.
The amount of the recapitalization wasn't disclosed, but Transition Systems will use proceeds to redeem $88.6 million of New England Medical's equity stake. Based on the medical center's 71% stake, the software company would be valued at nearly $125 million. A source close to the transaction who asked not to be identified said that estimate was conservative.
Transition Systems isn't the only property being sold off. Late in December, New England Medical made about $5 million from its interest in a Waltham, Mass.-based home infusion therapy provider called Chartwell Home Therapies. New York-based venture capital firm Welsh, Carson, Anderson & Stowe said it made a $34 million equity investment in that company.