Dalai's note: I present to you another very well written and researched piece about the AMICAS buyout from Mike Cannavo, the One and Only PACSMan. As I read through all this I keep wondering- where does the bridge loan from Morgan Stanley come into play? Could it be that Morgan Stanley stumbled upon what Mike and I have babbled here? I haven't a clue.
I don't want to offend the new guys, but I hope you (and they) will understand my fears. In my 20 years as a private practice radiologist, I've found one PACS that meshes well with the way I do things. It would be harmful to my practice, and to my patients, if that system is taken away or disrupted in any fashion. It's funny in a way. The deal reached this point due to the very real possibility of shareholders suing over the stock price they thought they should receive. I wonder how they would like it if I sued them for potential harm to my patients? But I digress. . .
While I have faith that the new owners will continue to grow and develop AMICAS' product line (why else risk $250 Million?), the financial maze through which this is being dragged boggles the mind and troubles the soul. Let Mike explain. . .
I love how women like Ms. PACS bait me by putting things up on a blog then telling me about it after the fact once it’s up, as a comment in an e-mail in a “by the way” fashion. This must be her way of playing the Wicked Witch of the West “I’ll get you my pretty and your little dog too ah ha ha ha ha …..” only her version of it is closer to “I’ll get you (to post something up on here one way or the other) my pretty (PACSMan)…” especially since my last posts on this topic have all be on the Dalai’s blog site. Once again using her feminine wiles she has succeeded…although if she keeps this up I’ll have my little dog Elvis (not Toto) hump her leg then pee on her bookshelves too…although she might actually enjoy the former (laugh).
Yes, Ms P., I have been following the Merge/AMICAS story closely and a lot of what is going on has me completely stumped. That said, I am not an investor in either company nor would I ever want to be- my objectivity in this market would suffer if I invested in any PACS company and my pocketbook would surely suffer if I invested in Merge. One look at the past six months is enough to make any investor cry, although Merge stock has rebounded $0.50 in the past two weeks- although why is anyone’s guess.
Now we come to the good stuff.
On April 2nd Merge completed a private placement of preferred and common stock totaling $41.75 million, which is specified for use in funding a portion of the proposed acquisition of AMICAS. The merger agreement contains a commitment from Merge to provide $40 million in preferred equity to the acquisition. This private placement will satisfy that commitment and is scheduled to close prior to the close of the tender offer to AMICAS shareholders.
Merge entered this securities purchase agreement with 14 institutional and other accredited investors, pursuant to which Merge will issue an aggregate of 41,750 shares of Series A Non-Voting Preferred Stock and 7,515,000 shares of common stock for a total purchase price of $41.75 million, before fees and expenses.
Now here is what don’t understand. 99.45% of the $40M in stock issued is common stock while only 0.55% is preferred. So what’s the big deal? A couple of days later Merge then announced its intent to offer $200 million aggregate principal amount of senior secured notes due 2015, which will be used to fund a portion of the proposed acquisition of AMICAS. The notes will be senior obligations of Merge and will be guaranteed on a senior basis by all of Merge’s domestic restricted subsidiaries.
What am I missing here? Fourteen investors said “Yup we are in!!” and get 7.5M shares of common stock with no guarantees attached to it whatsoever. Four days later Merge announces its intent to offer $200 million aggregate principal amount of senior secured notes due 2015, “guaranteed on a senior basis by all of Merge’s domestic restricted subsidiaries.” So if I read this right the $200 million comes with guarantees while almost all the $40 million comes with nada since it is “common stock”.
I have many friends in the industry that have been issued common stock before as employees, as have I, so that is my only frame of reference. Some have even been former e-Med employees (now part of Merge coincidentally). They worked hard and long for many years in the hope that once their company was sold that they would finally get their just reward. And they did, right in the ……This isn’t just e-Med folks who have had this happen to then- I can give you a list of at least half a dozen companies where the rich got richer (a.k.a. management and investors) and those who truly made the company what it was were left to squeal like a pig, Deliverance-style….
So what happened? Once all the preferred stock was paid the old Italian proverb that goes “Con nulla non si fa nulla” got put into play. Translated this means “Of nothing comes nothing”. And that is what they got. Top management and investors got theirs but what of the people who made these companies what they were? Niente….nothing…They couldn’t even use the stock as TP which they needed after the “good lovin” they just got by the companies they sacrificed their lives, marriages, and families for, all in the hopes of achieving the Great American Dream called financial freedom. They had common stock- just like the 7.5M shares that were issued on the 4th are…..
I hope I am wrong here but….it sure seems to me like someone needs to be kissed. Would these 14 investors have ponied up and laid $40M on the bar on knowing $200M in guaranteed stock would be offered a few days later? You’ll just have to ask them. But I bet a few are as confused as I am if not outright pi$$d off. I know I would be, assuming my assumptions are right that is.
The other interesting thing (to me, at any rate) is with the $40M “the securities to be issued in the private placement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) or any state securities laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission (“SEC”) or an applicable exemption from the registration requirements of the Securities Act. Merge has agreed to file a registration statement with the SEC covering the resale of the common stock issued in the private placement, provided however, that pursuant to the terms of the securities purchase agreement the investors shall be restricted from transferring the shares acquired in the private placement without the prior consent of Merge (other than to an affiliate) until the earlier of the first anniversary of their issuance or the occurrence of a “change of control” as defined in the securities purchase agreement.”
And the $200M? “The notes and the related guarantees will be offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States pursuant to Regulation S under the Securities Act. The notes and the related guarantees have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”
One seems to be registered, the other isn’t. Now again I’m way out of my comfort zone here and have no idea what the difference nor can I explain it but I’m not putting more than $250K of my hard earned money per bank account lest the FDIC not insure it. The same probably holds true here. Gimme a guarantee any day… Of course the FDIC will probably go bankrupt anyway but at least I can say I’ve been prudent in trying…
Now if Merge has already obtained $200 million of bridge financing from Morgan Stanley and has also started a cash tender offer for all of the outstanding shares of AMICAS which will expire at 12:00 midnight, New York City time, on April 15, 2010 (tonight), unless extended, why then do they need all this money? That’s sorta like your wife asking you to wear a condom five years after you had a vasectomy- and she is on the pill to boot…Someone please ‘splain me that to me ,Ricky, too…
I’m not sure I buy the statement made that “The successful acquisition of AMICAS will enable Merge to acquire one of its main competitors and widen its customer base. This will in turn expand the company’s top line.” Merge and AMICAS competed in very few accounts in both the PACS and RIS arena over the past five years – a few handfuls per year at best that I know of if that- so who is coming up with a blanket statement like this is anyone’s guess. That is like me putting up my profile on Millionaire Match in the hopes of finding my very own gold digger once I hit my first million later this year (provided the FDIC doesn’t go belly up that is).
That same report said the following” In the past, Merge has been paralyzed by several issues like a dwindling cash balance, management turnover, accounting miscues and litigations. The real turnaround started in the second quarter of 2008 when the company received the much-needed cash infusion of $20 million from Merrick RIS LLC in May 2008.” Real turnaround? You mean from $0.26 to over $2.00? Oh yeah, my bad again. But how soon some people forget the past:
Now let’s be fair and show the same time period they are referring to:
Wait!! Does that not show $4 a share in June 2009? Then a $3 a share in 2010? Below $2.00 a share in March 2010? Maybe jumping back up to over $2.50 is the turnaround they are referring to here but in my book this is more of Mr. Toad’s Wild Ride® or a trip in the Tower of Terror® at Walt Disney World than anything else. Turnaround? Look closer..
Annual Data (All numbers in thousands)
Period Ending 31-Dec-09 31-Dec-08 31-Dec-07
Total Revenue $66,841 $56,735 $59,752
Cost of Revenue $19,377 $20,072 $29,348
Gross Profit $47,464 $36,663 $30,224
Total Operating Expenses $38,501 $58,360 $201,462
Operating Income or Loss $8,963 ($21,697) ($171,568)
Net Income $285 ($23,683) ($171,568)
Um…. to me this looks like they still lost over $23.6M in 2008. I guess compared with losing $171M this is a turnaround for sure…but that’s like comparing me to John Holmes (God rest his perverted soul).
This year Merge made $285K (K is the symbol for thousand for those economically challenged) on almost $67M in revenue- although they would have made more if they didn’t lose over $2M in the 4th quarter. To me that’s hardly worth getting out of bed for…Now let me say that given the softness of the imaging marketplace ANY profit is commendable- you go Merge, especially since big boys could have used some Viagra this year their sales were so soft- but I’d feel a lot more comfortable if Merge made their profit on actual SALES rather than through a $20M (that’s million) reduction on operating expenses. Still a profit is a profit so…
Now I hear a lot about longs and shorts and I’m not talking about my Johnson either but from Merge’s 2008 10K I found this:
Common Stock Market Prices
2009 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
High $4.25 $4.78 $4.48 $1.84
Low $2.93 $2.98 $1.25 $1.07
2008 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
High $1.75 $1.60 $1.37 $1.26
Low $0.26 $0.60 $0.26 $0.33
COMPARISON OF THE 5 YEAR CUMULATIVE TOTAL RETURNS
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 2009
Now for those who have a hard time interpreting what this means $100 invested in Merge would bring you a $15 ROI today, $121 if you invested it in the NASDAQ and $96 in the Russell 2000 Index…Of course that is triple what Merge brought in 2007 ($5/share)and yes, nearly as much in the “turnaround year 2008” ($6/share) as well so again we do have a turnaround…so to speak…
So what’s going to happen?
Merge has a very very sharp, financially savvy management team who understand the financial marketplace. They are some of the best of the best from the finance world and know how to turn a profit. That, no doubt, is what they will do. And contrary to what they might be feeling right now I also like the company although there is no way in hell that if I did invest I would invest in them, especially since they just got downgraded by Moody to a B2 as well, five notches below investment grade. Moody also said the new company lacks a revolving credit facility that could lead to the depletion of its cash reserves and cause a ratings downgrade or negative outlook. Despite this “Other than that Mrs Lincoln, how did you like the play” statement just keeping Merge alive this long speaks volumes to what they have managed to do so….so kudos to their team. The bottom line here is I just don’t like what may happen to AMICAS because this isn’t about doing what’s right for the imaging community but instead what is “right” (and I use this term very loosely) for the investment community. The Thoma Bravo deal was the former- what’s right for the imaging community. This “deal” is the latter.
So here are the PACSMan’s predictions, assuming of course the sale does go through, that is. As I expected, Merge missed the midnight April 15th cutoff to raise the $200M and has requested a one week extension (until 4/23) to tender the 10.2% of AMICAS shares remaining (they sold 33,297,311 shares already). The six business day extension of the Offer is less than the ten business day extension permitted under the merger agreement between Merge Healthcare, Project Ready Corp. and AMICAS as a result of the tender of less than 90% of the outstanding shares of AMICAS common stock. Merge Healthcare expects to close the Offer on or about April 28, 2010.
OK, back to my predictions. A few months after the sale goes through (if that long) the boys up top will get out their Ginsu knives and slice and dice both companies to maximize the investment and show a decent ROI to the investors. They will keep what the products and services they feel they can grow and profit from and ditch the rest. And if a few (or more than a few) people happen to get hurt along the way, well that’s called collateral damage. “It” happens and no one, especially not the investors, give a rat’s…..It’s all about the buck.
Now the burning question- will AMICAS PACS survive? I sure hope so. It’s a great product with even better potential- the best in the entire Merge/AMICAS portfolio. Is it worth more gone than with Merge at the helm trying to keep it alive? I know one company who is chomping at the bit to get a great PACS product since theirs is abysmal. It’s a great fit too and them spending the money for AMICAS is like the Dalai and I going out to lunch. But don’t ask me who cuz I’m not saying…and there are lots of abysmal PACS out there as well so guess away…
What about the other products in the line including the ones that have the strongest OEM relationships i.e. Cedera, Camtronics, and eFilm? That remains to be seen… I’d put money that there are a few buyers lined up for some of these products already as well. Don’t ask me who, though, cuz I’m also not saying, but I have some very strong hunches.
In my hometown this week we experienced nothing short of a miracle. A mere two miles from my house an 11 year old girl who was lost in dense woods filled with snakes and alligators got rescued. Very near the 96 hour point where a search and rescue operation becomes a recovery operation, a volunteer from her former church who really shouldn’t have been in there looking for her found her- bug bitten and dehydrated but very much alive… Everyone I know shed a tear or two. I have kids as well and know how it feels to not be able to find your child. When my “baby” Matt, who will be 17 on Friday, was age two he was “lost” for a whole 30 minutes, very well hidden in our house. During the time from when we called 911 until he was found we had five sheriff’s deputies inside and out plus a chopper overhead looking for him. God bless these people. I can’t even fathom going for four days now knowing how or where our child is except being lost somewhere out there. Yet the girl, her rescuer, and her parents all quoted a single bible verse that sustained them, Proverbs 3:5 “Trust in the Lord with all your heart and lean not on your own understanding.”
I put my trust in Him always and sincerely hope that the trust I have in Merge management to do the right thing for both its and AMICAS’ people and not just the investors is not displaced…
Only time will tell…stay tuned….