| BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Commentary: Anatomy of a Shareholder Slaughter It's impossible for anyone to be on top of every niggling detail of a company's finances. But when securities analysts and a publicly held company on a buying binge ignore obvious warning signs in public financial statements, then it's time for investors to complain. After all, it's shareholders who feel the pain when the truth comes out. Case in point: McKesson HBOC's Apr. 28 bombshell news that more than $44 million in revenues that it had recorded had not, in fact, been realized. McKesson's stock price immediately dropped by nearly half, and the shareholder suits are already coming. So, potentially, is more bad news. The hole in Mc-Kesson's results came from HBO & Co., an Atlanta-based health-care-software maker that it acquired in January. When McKesson started its fiscal year-end audit, it found that some software contracts weren't quite the done deals they were thought to be. McKesson's auditing firm, Deloitte & Touche, is still probing the numbers, and McKesson warns that it may restate more earnings. TWO RED FLAGS. The missing $44 million itself isn't a devastating blow to McKesson, a $21 billion company that will eventually make up the shortfall. But it might not regain the trust of shareholders so easily--especially since all this could have been avoided. There had been warning signs for two years that something was amiss at HBOC. Using the company's public filings with the Securities & Exchange Commission, forensic accountant Howard Schilit's company, Center for Financial Research & Analysis Inc., ran up the first red flag on HBOC in 1997 and waved another last August. The analysts who followed the software company and recommended its shares can't say they didn't know about Schilit's concerns; half a dozen lambasted his first report, and three of them actually wrote rebuttals. Even without such warnings, analysts should have been looking askance at HBOC. All its rivals were struggling because of cost pressures brought on by managed care--yet HBOC was going gangbusters. How? It kept up its 55% annual growth rate through acquisitions, a ''roll-up'' strategy that let it post great numbers without over-relying on its core business: producing software systems for hospitals and doctors. McKesson was following a similar path, having bought 10 companies since 1996. When McKesson and HBOC sat down to talk last summer, two roll-ups were poised to collide. ''It's not a question of will a roll-up company blow apart. It's almost always a question of when,'' says Schilit. After a year or two of buying choice companies at reasonable prices, roll-ups get sloppy, he claims, overpaying or buying poorer-quality companies. McKesson insists that neither it nor HBOC was a true roll-up. Spokesman Larry Kurtz says it wasn't combining similar businesses but buying new ones to offer a broader array of services. ''These were all strategic acquisitions,'' he says, ''and I would include HBOC in that category.'' SPILLED MILK. Bear Stearns, representing McKesson, blessed the deal--as did Morgan Stanley for HBOC. CFRA says the warning signs were all too apparent in HBOC's numbers. The analyst who wrote CFRA's report, Christopher S. Teeters, said he became concerned when receivables began to climb faster than revenue. The company was using an aggressive but legal accounting method--recording cash receipts before they came in the door, sometimes even before clients were billed. Another danger sign: HBOC's operating cash flow fell well below net income in the two quarters before it began talks with McKesson. In the quarter ended in June, 1998, cash flow from operations was just over half net income, down from more than double a year earlier. ''We performed due diligence prior to the merger assisted by expert outside investment-banking, accounting, and legal counsel, and nothing in the due diligence suggested that this was a problem,'' Kurtz says. Now, however, the analysts who smiled upon the HBOC deal are second-guessing the purchase. This kind of vigilance would have helped beforehand. Unfortunately for investors, it's a little late. By Janet Rae-Dupree _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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