The hiring of Mac Crawford as president and chief executive officer of MedPartners may signal the beginning of the end for the physician practice management giant as we know it.
Crawford's experience is in turning troubled companies around, not working directly with physicians. Since 1992, he has been president of Magellan Health Services, the former Charter Medical Corp., which was a psychiatric hospital operator just out of bankruptcy when he joined. By the time he left last month (March 18), Magellan had been transformed into a money-making managed care company.
Salomon Smith Barney analyst Lawrence Marsh said a prepared statement issued upon Crawford's hiring already hinted his turnaround plan may include breaking up MedPartners. Crawford's statement said: "I believe that MedPartners' three businesses -- physician practice management, pharmacy benefit management and physician contracting -- are fundamentally strong."
Marsh says Crawford's mentioning MedPartners' business units by name is a signal that the company could be split into three separate pieces.
Whether those businesses are strong together is questionable, according to Marsh's March 19 report following Crawford's hiring. As separate pieces, each division could be worth $15 to $16 per share, compared with the $10 to $11 per share the whole company is worth, Marsh says.
Marsh also notes that Wall Street's reaction to Crawford's hiring is "mixed," because though he's respected as a turnaround specialist, he's an unknown when it comes to running a physician company.
Crawford was not available to talk to reporters about how the company will turn around its money-losing ways. Neither was Richard Scrushy, who will continue to straddle between chairmanships at MedPartners and rehabilitation provider HealthSouth.
The two weren't just avoiding reporters; Marsh laments in his report that stock analysts "found it interesting that the company is apparently choosing not to discuss the situation through a conference call or other real discussion forum (with analysts)."
Because analysts hate silence even more than missed earnings projections, MedPartners' stock price dropped 10% to $10.69 on March 19, the first day of trading after Crawford's appointment.
MedPartners' fourth-quarter earnings also were worse than expected, and expectations were pretty low to begin with. On Jan. 7, when founding president and chairman Larry House resigned, the company signaled it would lose $185 million in the fourth quarter of 1997.
Instead, the loss was an eye-popping $840 million, or $4.47 per share, on $1.7 billion in revenue. In the like period of 1996, MedPartners earned $29.9 million, or 17 cents per share, on $1.3 billion in revenue. For all of 1997, MedPartners lost $820 million, or $4.42 per share, on $6.3 billion in revenue compared to a loss of $145.5 million, or 83 cents per share, in 1996.
The fourth-quarter killer was $646.7 million in pre-tax charges for operational restructuring. MedPartners had said it would write down $115 million, but it also charged off unexpectedly another $532 million in "impairment" of goodwill -- money paid for the intangible benefits of a practice. That equated to half of MedPartners' intangible assets as of Sept. 30, 1997, Marsh says.
MedPartners did not explain its reasoning for such a large charge-off in goodwill, which would usually be depreciated over 10 years instead of two.
More damning, MedPartners in the fourth quarter lost $190 million, or $1.01 per share, on continuing operations, far more than the 20- to 25-cents-per-share loss it predicted to analysts. Losses include charges for boosting cash reserves, writing off bad HMO receivables and covering integration costs.
Continuing operations are comprised of the physician practices MedPartners operated that were not new acquisitions in the three-month period. In 1996, MedPartners made $43.1 million, or 24 cents per share, on continuing operations.
All of this leaves MedPartners with $1.2 billion in long-term debt with only $80 million in shareholder equity, meaning assets minus liabilities. Many banks wouldn't lend to a company this far in the hole, Marsh suggests.
However, analysts say many of MedPartners' charges are one-time writedowns that could actually position the company for a stronger future. Now it's up to Mac Crawford, under Scrushy's watchful eye, to pull it off.
MD Alliance president William Fickling III thinks Crawford can do it. Fickling worked under Crawford when Crawford was president of Mulberry Street Investment Co., a Macon, Ga.-based investment firm founded by Fickling's father. Crawford was in charge of turning around the private companies Mulberry Street purchased, which led to his eventual move to Charter/Magellan when the investment company got involved there.
"It's my observation that being good at numbers, (Crawford) was able to turn around some of the companies that had gotten in trouble by disposing of money-losing operations," says Fickling. "It's something he's good at."