If its stock price doesn't shoot back up soon, physician practice management company PhyMatrix is going to have to shell out about 41% more stock than it planned for six 1996 acquisitions initiated in its headiest days as a public company.
The West Palm Beach, Fla.-based multispecialty PPM last year promised a collective $7.1 million of stock to be delivered between May and August of this year to the six practices, according to the company's Securities and Exchange Commission filings. At the time of the deals, when PhyMatrix traded for around $23, the company would have sent 309,366 shares. At its mid-April trading price of $13, PhyMatrix would owe 559,742 shares.
But despite the drop in stock value, which has affected virtually every publicly and privately held PPM, PhyMatrix plans to use stock as up to 80% of the currency it offers for acquisitions, including three closed between March 26 and April 7.
"It's very expensive currency for us," said William Sanger, PhyMatrix's vice president of mergers and acquisitions. "But doctors don't have a problem taking the stock."
PhyMatrix isn't the only PPM with physicians eager to get a piece of the company. According to a study released in April by Atlanta-based investment bank Robinson-Humphrey Co., PPMs use stock to cover 47% of the price of acquisitions despite, as Sanger put it, having "taken a haircut" on stock price in the past year.
The survey said another 35% of the average practice acquisition is paid in cash, and the remaining 18% in interest-bearing notes. With the dip in PPMs' stock value, it's possible cash and notes may be a bigger part of future deals, said Robinson-Humphrey senior healthcare analyst John Runningen.
"PPMs are going to find the capital to meet their long-term objectives," Runningen said. "But they will have to explore other sources."
Robinson-Humphrey received responses from 30 PPMs to questions regarding their financial and managerial structures. Only 12 broke down their ratios of stock, notes and cash in acquisitions (See chart); holdouts on those questions included giants MedPartners of Birmingham, Ala., and FPA Medical Management of San Diego.
Even those who answered the questions said the makeup of each deal can vary widely.
It's no surprise that stock would make up the largest percentage of currency for acquisitions, Runningen said. First, PPMs believe that offering stock to physicians will give them an incentive to stay rather than cash out. Also, for much of last year PPM stock traded for an unusually high 50 price-to-earnings multiple, making the stock a valuable currency and encouraging companies to go public so they would have more of it to finance growth strategies based mainly on acquisitions.
But since last fall, "the whole (PPM) industry has come under the microscope" in terms of its financial fundamentals, said Kenneth Weakley, Merrill Lynch assistant vice president. That has sent stock prices for some PPMs down as much as 60% since last fall, although companies last month were still trading at a healthy multiple of about 28.
Still, Nashville-based pathology PPM AmeriPath on April 3 pulled a scheduled initial public offering after a lukewarm response forced a reduction of its offering to 4 million shares at $10 each instead of the hoped-for 6.2 million in a range of $13 to $15. The company did not return phone calls for comment on how this would affect its acquisition strategy.
Meanwhile, possible SEC and Financial Accounting Standards Board changes could drag down the stocks of other companies, said Salomon Brothers healthcare analyst Lawrence Marsh. The SEC is looking at amending a rule to allow physicians to sell their PPM stock after one year instead of two years. Also, the FASB is considering eliminating or restricting so-called pooling of interests, which allow PPM companies to account for stock mergers in a way that does not depress earnings.
Said Merrill Lynch's Weakley, "Increasingly an issue for companies in this industry is, how do you finance your growth?"
Large PPMs like MedPartners and Nashville-based PhyCor "will have no problems," and more physicians may lean more toward selling out to bigger companies because of stability in their stock prices, Weakley said.
Nevertheless, many doctors still are willing to accept a PPM's stock even when it isn't quite as valuable. In fact, for the doctors, a reduced stock price may be a better deal.
Elliott Jeter, assistant director of development for Dallas-based MedSynergies, said the ophthalmologists who agree to sell their practices to his privately held, single-specialty company often demand a greater equity share than the 50-50 cash and stock mixture the 95% physician-owned company prefers.
"A couple hundred thousand in cash doesn't mean anything to them," said Jeter, whose 6-month-old company has acquired the practices of 51 ophthalmologists. "They're convinced the downward pressure (on stock prices) is weeding out the weaker companies."
Although many physicians still are optimistic on the outlook of the industry, some aren't quite as bullish, Jeter said. Where the company once sold itself on the basis of its future stock valuation, now "we've shifted from selling stock and cash to selling our services."