PhyCor and MedPartners aborted their proposed merger last week, saying they couldn't reconcile their operating styles.
The abrupt move preserved competition in the physician practice management industry but rocked confidence in the two leaders.
MedPartners also announced it would not meet earnings expectations for the first time since it went public in February 1995. On the combined news, MedPartners stock plunged 45%. PhyCor's shares dipped 6%.
MedPartners, the industry vanguard in global capitation, said it would record one-time charges of $145 million for the fourth quarter partly as a result of losses associated with its West Coast operations.
The companies said their decision to walk away from the merger was mutual, citing "significant operational and strategic differences" that would prevent successful integration. Expected to close in the first quarter, the deal would have created a company with 35,000 physicians and combined annual revenues of $8.4 billion.
The companies declined to say whether they attempted to renegotiate the price. Many observers believed PhyCor was overpaying, especially given a decline in the price of MedPartners' stock since the merger was announced Oct. 29. PhyCor was to issue 1.18 shares of stock for each MedPartners share and assume MedPartners' debt. As of last week, the deal would have amounted to $6.5 billion, down from $8 billion when it was proposed.
Officials tried in vain to put a positive spin on negative earnings, stressing the PPM's ability to identify and correct overutilization quickly. But in a conference call, analysts asked them to defend why they had not disclosed problems earlier.
MedPartners executives said they expected a fourth-quarter loss of up to 25 cents per share; analysts had projected a 32-cent gain. They also advised that MedPartners' 1998 earnings would fall 30% short of projections.
Its troubles recalled the recent earnings disappointments of HMOs -- also affected by high utilization and drug costs.
"People are assuming the worst and saying, `What else are we missing that would cause PhyCor to walk away?' " said Larry Marsh, a Salomon Smith Barney analyst.
PhyCor didn't walk away unscathed.
"Some people who thought of (PhyCor) as being an extremely methodical company were shaken by the boldness and speed and apparent lack of thorough due diligence prior to announcing this deal," said Piper Jaffray analyst Brooks O'Neil.
Some observers said the companies' cultural and operational differences were apparent before the deal was announced.
Joseph Hutts, PhyCor's chairman, chief executive officer and president, said his company "handled it about as well as you can on the basis of the information you have in the initial stages."
Hutts said he won't hesitate to acquire other companies.
Last month, PhyCor said it would buy Atlanta-based First Physician Care, its second purchase of another PPM. It also agreed to buy Seattle-based CareWise, which operates patient call centers that help physician groups manage demand for care.
MedPartners attributed $70 million of its losses to a slowdown in acquisition activity because of the pending merger, as well as a delay in integrating Friendly Hills HealthCare Network with other Southern California operations. Last summer, MedPartners settled lawsuits with former executives of the medical group whom it fired for hampering integration efforts.
MedPartners also posted losses from restructuring its West Coast operations into three divisions, closing 60 small clinics and selling 19 practices in non-key markets.
President and Chief Operating Officer Mark Wagar said the introduction of open-access plans in Southern California created confusion because "people essentially expected to go anywhere anytime. Once we identified that, we were able to communicate with the physicians at the field level (and) bring things back into line."
Santa Barbara, Calif.-based Tenet Healthcare Corp., which signed an agreement with MedPartners last September to form a joint delivery network in Southern California, called all the developments a moot point. "MedPartners has the premier physician delivery system for managed-care in Southern California, and they have a strong future in this marketplace regardless," said Tenet spokesman Lance Ignon.
On Jan. 9, two days after the breakup announcement, MedPartners' stock closed at $8.75, down $9.41, or 52%. PhyCor stock closed at $22.38, down $4.06, or 15%. Since Oct. 15, MedPartners' stock has lost 60% of its value.