The Health Care M&A Monthly: How Will the Market Respond in the Wake of Terrorism?

The sights and sounds of September 11, 2001 will stay burned into our minds for some time to come. On that black Tuesday, much of the country’s financial activity was suspended: the major stock exchanges closed and the M&A market ground to a virtual standstill. No deals were announced during the remainder of the week as our collective consciousness paused to encompass the enormity of the day’s events and to sort out what must be done to respond to the challenges fate has now placed across our paths.
It is certain that activity in the capital markets after the terrorist attacks on New York and Washington, DC will have an immediate impact on merger and acquisition activity. In terms of announcing or closing deals, a number of transactions will naturally be delayed. The plunge in stock prices will surely affect the valuation of deals both in progress and in the making. And the terms of deals whose primary acquisition currency is stock may have to be seriously revisited.
While we cannot minimize the profound loss of life, property or potential from this disaster, the economic and financial impact of these attacks may be viewed from one standpoint as largely symbolic actions designed to demoralize our communities beyond the specific, tangible losses they inflicted. However, we believe that our financial, governmental and corporate institutions will over the long term remain fundamentally strong. As we emerge from this crisis and these fundamentals reassert themselves, our capital markets will rebound and financial activity, including mergers and acquisitions, will resume.
In the meanwhile, a number of companies have announced plans to buy back their shares to buttress their capital structures and stock valuations, including Pharmacia (NYSE: PHA), Cardinal Health (NYSE: CAH), Dialysis Corporation of America (NASDAQ: DCAI) and Moore Medical Corp. (AMEX: MMD). Sunrise Assisted Living (NASDAQ: SNRZ) will increase by $50 million its plan to buy back its convertible debt. AmeriPath (NASDAQ: PATH) filed an S-3 to offer 4.125 million of its shares.
Initial public offerings of stock for such companies as Therasense, Inc. and United Hospital Services, originally scheduled for the week of September 17, have been postponed indefinitely. Not until the markets stabilize will these companies put their toes in the financial waters again.
In the immediate wake of these tragedies, the health care industry remained fairly stable, and was not battered nearly as hard as the airline, hotel and insurance industries. As trading resumed on Monday, September 17, the DJIA health care sector index dropped only 1.3% from its close before the World Trade Center disaster, a much less precipitous drop than either the DJIA or the NASDAQ Composite indexes experienced.
As insurers, MCOs, or managed care organizations, are among the most vulnerable companies in the health care arena to the fallout from the disaster. Two health insurers in the New York City area, Oxford Health Plans (NASDAQ: OXHP) and Empire Blue Cross Blue Shield, which occupied 10 stories of the World Trade Center, may see near-term financial and operational pressures. Larger HMOs with a national perspective, such as Aetna, Inc. (NYSE: AET) and Cigna Corp. (NYSE: CI) do not believe their results will be materially impacted.
We tracked in-house the stock performance of eight publicly traded hospital companies, 10 medical device firms and 10 pharmaceutical houses that have all been acquirers in the recent past. The stock prices of the hospital companies fell 3% on average following the disaster. Five of the eight rose on the second day after trading resumed. The stock prices of the medical device companies fell 6.3% on average, dragged down in part by large electronics companies such as General Electric (NYSE: GE) and Royal Philips Electronics (NYSE: PHG) for whom medical devices are but one of many business lines; even so, seven out of the 10 outperformed the DJIA, NASDAQ Composite and S&P 500 indexes. The stock prices of the 10 pharmaceutical companies fell only 0.75% on average, and the majority of them rose on the second day after trading resumed.
We suspect that as we emerge from the psychological aftershock of these attacks and begin to repair our institutions and restore their activities, investors will move their money from the sectors hardest hit to the more stalwart ones, including health care. As they do, financing of M&A activity will resume. Only six deals were announced during the week of September 10; the following week the volume began to recover with a dozen transactions.