Lots of stocks get a nice pop when news hits about a buyout. Hospital operator Health Management Associates , though, got a big drop rather than a nice pop from the announcement of its acquisition by Community Health Systems . HMA's shares fell nearly 11% in early trading on Tuesday. What happened?
Much of HMA's stock decline can be attributed to simple arithmetic. Community Health offered $3.9 billion in cash and stock for HMA, which translates to around $13.78 per share.
However, HMA closed on Monday at $14.95 per share. Community Health's bid represents a discount of almost 8% from HMA's Monday price.
There was a sweetener thrown into the mix, though. HMA shareholders will receive contingent value rights to an additional $1 per share pending the outcome of undisclosed legal proceedings. If we add this contingent value to Community Health's offer price, that makes the offer more attractive.
The best of times, the worst of times
To be honest, this is probably as good of a deal as HMA could expect to get. The stock has enjoyed great success over the last year, soaring more than 120%. However, the hospital chain has also faced plenty of problems.
Last December, CBS news program 60 Minutes clobbered HMA. The program highlighted allegations from current and former HMA employees that the company pressured doctors to admit more patients to inflate its revenue. HMA denied the allegations.
HMA reported disappointing first quarter results earlier this year, with lower admissions than expected. Now, the company is saying that sluggish admissions continues to be a problem. As a result, HMA projected second-quarter earnings of $0.10 to $0.11 per share, way below the $0.21 per share expected by analysts.
Those aren't HMA's only worries, though. The company reported that the U.S. Department of Health and Human Services has issued more subpoenas on top of ones from 2011. These subpoenas relate to possible issues relating to emergency room operations and physician relationships.
Better days ahead?
You might say that this acquisition demonstrates that misery loves company. Community Health also reported decreased admission and lower-than-expected revenue with its second-quarter results announcement on Monday. Are better days ahead?
All of the major hospital chains anxiously await the promises from the Patient Protection and Affordable Care Act, also known as Obamacare, to be realized. Hospital stocks as a group have surged in anticipation of fewer uninsured patients that can cause losses from bad debt write-offs. Community Health is up over 90% in the past year. Tenet shares skyrocketed more than 140%. The largest chain, HCA lags behind the others but is still up over 43% in the last 12 months.
If Deloitte's models are correct, though, those expectations might be too high. Deloitte's Center for Health Solutions says that hospitals won't see a drop in bad debt with health reform.
There remains some hope for better days for larger hospital operators. That hope stems from exactly what we're seeing with Community Health and HMA: consolidation. Combining hospitals under one management structure provides cost savings and, perhaps more importantly, can provide more pricing leverage.
It's no coincidence that we're seeing big hospital mergers. Tenet announced in June that it would buy Vanguard Health Systems for $1.73 billion. Tenet CEO Trevor Fetter said at the time, "All of the uncertainty around health reform has many health care systems concerned about how they are going to navigate this new era. You have to have size and scale to succeed."
Community Health CEO Wayne Smith didn't use the same words, but he essentially echoed Fetter. Smith stated that the acquisition of HMA provides scale to "realize the benefits of health care reform and to address the changing dynamics of our industry."
HCA hasn't announced any big acquisitions at this point. It wouldn't be surprising, though, if the company put together a string of smaller deals similar to its Kansas City pickups earlier this year.
Getting bigger seems to be the key for getting better for hospital chains. However, with the huge gains from the past year and uncertainties over how well Obamacare will work, investors might want to stay on the sidelines when it comes to hospital stocks.
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The article HMA Sinks Like a Brick on Acquisition by Community Health originally appeared on Fool.com.Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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