When it comes to investing, Warren Buffett is as good they get. His talent for sizing up the value of corporations has earned him a net worth of more than $30 billion.
So when Buffett offers an observation, a lot of people take notes. Fortune magazine recently published a transcript of a talk by the famed chairman of Berkshire Hathaway and Microsoft founder Bill Gates to business students at the University of Washington. Here's part of what Buffett had to say about mergers:
"I am suspicious of people who just keep acquiring almost by the week. . . . Frequently, if some company is on a real acquisition binge, they feel they're using funny money, and it has certain aspects of a chain-letter game. . . . I get suspicious when there's too much activity. I like to see organic growth."
If Buffett follows the healthcare industry, he must be as suspicious as Sherlock Holmes at a murder scene. Within the past couple of weeks, evidence of acquisition excess has been unmistakable.
For example, Columbia/HCA Healthcare Corp., which once devoured hospitals and healthcare companies almost by the week, continues to pay dearly for its binge. It agreed to pay $2.5 million to settle Federal Trade Commission charges that it violated a 1995 order to divest hospitals in Florida and Utah in a timely manner. The company also announced it was taking $95 million in charges and losses related to discontinued businesses and sales of businesses.
But lest anyone think only for-profit corporations engage in reckless acquisition, there was the spectacle of Allegheny Health, Education and Research Foundation, which filed for bankruptcy last month. This system embraced aggressive acquisition, gobbling up hospitals near and far, buying physician practices and taking on insurance risk. It also borrowed heavily to do this, racking up a staggering $1.3 billion in debt and a negative cash flow averaging $27 million a month.
The Allegheny saga is even more amazing because of the apparent failure of the system's trustees to recognize a disaster in the making. As last week's story on AHERF (Aug. 3, p. 20) noted, numerous captains of industry served on the board. If these people are so unquestioning or so blase about debt that they were blind to the system's weaknesses, corporate America may be in peril.
After years of frantic mergers and acquisitions, it might be time for some healthcare chains and systems to take a breather. They could reflect for a moment on whether the deals have made the organizations stronger or more vulnerable. And whether they have created what should have been the goal from the start -- what Warren Buffett seeks: value.