Thursday, December 25, 2008

Trouble In Paradise

In the PACS world, a company either survives until the next RSNA, it goes under, or it is bought out by another company, either a rival or an investor. The last option is supposed to be the fate of Emageon, the Birmingham-based PACS vendor started by a couple of neurosurgeons at UAB.

Emageon has had some financial woes of late, and ultimately, its shareholders voted to sell to Health Systems of Tampa. From the Tampa Bay Business Journal:

Health Systems Solutions was founded in Tampa in 2002 as a software company serving home health care agencies. Under new management, the company has transitioned to providing custom IT solutions and services. It also has relocated its corporate headquarters to New York, while Tampa remains headquarters for the home health care operations. . .

The acquisition of Emageon will provide Health Systems Solutions with a strong platform to enter the medical imaging market, company executives said during a Dec. 3 investor presentation at the Piper Jaffray Health Care Conference.

Health Systems was all set to buy Emageon for $62 Million, or $2.85 per share. This is a pretty good deal, especially in light of the fact that Emageon itself bought a cardiology imaging company called Camtronics from Analogic Corporation in 2005 for $40 Million. Those were the days.

There appears to be some trouble in Paradise. Emageon stockholders voted on December 18 to proceed with the merger/purchase. But on the 22nd, CEO Chuck Jett announced:

"We believe we have an obligation to consummate our merger in an expeditious manner in accordance with the requirements of both parties under the merger agreement," said Chuck Jett, Chief Executive Officer of Emageon. "We also believe our stockholders, who have resoundingly supported this transaction, desire us to move forward without delay. Health Systems has not agreed to set a closing date, instead making additional due diligence requests. This news was especially surprising given Health Systems' recent public and private support of the transaction."

Mr. Jett continued, "There is no due diligence condition in the merger agreement and the time for due diligence ended when the parties signed the merger agreement. Health Systems has also asserted purported breaches of our representations, warranties and covenants under the merger agreement, which we categorically deny and reject as immaterial. Health Systems is clearly stalling for reasons that are not apparent to us and unrelated to any purported breaches of the merger agreement. We believe we have satisfied our conditions to closing and that it is time for Health Systems to comply with its obligations and close the merger. In the event the closing does not occur by Tuesday, December 23, 2008, we intend to pursue our rights and remedies under the merger agreement."

I suppose its better to get the fighting done before the wedding, but a naive reader such as myself would be very wary after this statement. I am a firm believer in due diligence , and it sounds like Mr. Jett is saying that "Health Systems don't need no stinkin' due diligence" because Emageon is a good company (which it is, of course) and they didn't ask for it in the prenup.

So, what was the problem? It seems to lie with the purchase price itself. Some (lawyers) seem to think it was too low and implied that there was a little hanky-panky involved:

Emageon Inc. (“Emageon” or the “Company”) (NasdaqGM: EMAG) announced that it agreed to be acquired by Health Systems Solutions Inc. Under the terms of the agreement, Emageon shareholders would receive $2.85 in cash for every Emageon share they own, for a total sale price of approximately $62 million. The price is unfair given that Emageon stock traded at $2.90 per share as recently as June 23, 2008 and at least one analyst has a $4 per share price target for Emageon stock. Furthermore, the sales process the Company conducted was flawed, given that in contravention of their fiduciary duties to maximize shareholder value, the Company’s Board agreed to a “no-solicitation” provision and a $3 million termination fee which will ensure no superior offer will ever be forthcoming.
And then again, maybe the price was too high, since the stock price was putting along at $2.50 until some more recent unpleasantness (see below) drove it down to $1.50 per share.

The spat was apparently put to bed, and the deal was to proceed (From the Birmingham Business Journal):

Health Systems Solutions Inc. has closed on its $62 million purchase of Birmingham’s Emageon Inc.

A day after Emageon Inc. demanded in a federal filing Health Systems close the deal by Tuesday, the Tampa firm told its bank to transfer $62 million to the medical technology firm to close the previously announced merger deal.

Health Systems said it instructed Stanford International Bank Limited to provide the funding to consummate the transaction on Tuesday. Emageon has not yet received notice of SIBL's response to this request, according to a news release.

Emageon officials claimed in a Monday news release that Health Systems had not agreed to a closing date and had made additional due diligence requests. Health Systems agreed to buy Emageon in October. Emageon produces technology that helps doctors analyze images to diagnose and treat patients.

Emageon’s shareholders voted to approve the sale on Dec. 17. Health Systems has said it will keep Emageon’s base in Birmingham.

Emageon stock fell to $1.30 Monday morning after closing at $2.22 on Friday. It was trading near $1.65 in late Tuesday morning trading.

So far, so good, right? Wrong... An Emageon press release from December 24 (yesterday) states:

Emageon Inc. (Nasdaq: EMAG) today announced that it has received a letter from Health Systems Solutions, Inc. (OTC Bulletin Board: HSSO) indicating that Stanford International Bank Limited (SIBL) will not provide the funding to consummate the transaction at this time. The letter further provided that Health Systems is continuing to seek to cause SIBL to fund the transaction and that Health Systems is undertaking further efforts to consummate the transaction.

Commenting on the situation, Emageon Chief Executive Officer Chuck Jett stated, "We continue to seek to engage Health Systems and SIBL in a constructive dialogue towards the goal of closing as soon as possible. We are also hopeful that Health Systems will begin to take all such actions as required under the merger agreement to remedy the failure to finance the transaction and close promptly. Failure to remedy the financing promptly will require us to seek all remedies to enforce our rights for the benefit of our stockholders."

Uh oh. Now, whatever could Mr. Jett intend to do with this? Will he force Health Systems to find other financing? Is there some big penalty they will have to pay? Will they kiss and make up (and consummate), or will they break up and seek other partners?
Stay tuned for the next episode of "As the PACS Companies Turn."


The Emageon saga continues, dragging the company’s name further in the mud. Would-be acquirer Health Systems Solutions, Inc. says its major shareholder, Antigua-based Stanford International Bank Ltd., won’t provide the funds for the acquisition to go through. Emageon CEO Charles Jett seems to be the outraged spokesperson, but he’s not a major player given that he was ousted from the board last summer after an ugly proxy fight with Oliver Press Partners. Now it could be that Stanford is just playing with the stock behind the scenes, safely tucked away in Antigua outside US jurisdiction, but it makes more sense that they’ve found something they don’t like about Emageon and their carefully created legal structure gives them an out that they’ve chosen to exercise. Or, that billionaire owner Allen Stanford and Oliver Press don’t get along, like Gordon Gekko and Sir Larry Wildman in Wall Street (Stanford really is a Sir, the first person knighted by Antigua, where he holds dual citizenship along with the USA).
Here's a picture of Sir Allen's little bungalow in Antigua:


Anonymous said...

Dalai, I love your blog, but there's a relatively impressive information gap in your Emageon post. First of all, Mr. Jett is not the decision maker here. That person would be activist shareholder Gus Oliver, 16.6% owner of Emageon shares. He effectively controls the board (after a long fight).

The sale of Emageon has been in the works since July. Three "finalist" bidders were selected, HSS, an industry bidder which came in at $2.45, and a private equity firm which bid $2.20. Mr. Press went with the $2.85 bid from HSS, backed by Stanford International Bank Limited (incorporated in Antigua-RED FLAG, RED FLAG), which is run by an eccentric ex-American financier billionaire by the name of Allen Stanford).

In any case, the deal was all but done, and financial backer Stanford Bank told HSS at the last minute that it would not provide financing as contractually agreed. Interesting, given that HSS is OWNED by Stanford International Bank. Is your head spinning yet?

So, we are now likely off the court. We don't know why Stanford has backed out. Perhaps there is something in the deal they don't like. Perhaps they don't have the money. In my view, the problem is that they just don't want to do the deal, and they don't have to because they have very few assets to attach in the United States. Antiguan-chartered banks don't really have to comply with US law or US judgements. That's why they are domiciled in Antigua.

Mr. Oliver is a premier M&A attorney, so my guess is that he wants to fight it out in court. This is a drama which has just begun to unfold.

Anonymous said...

1) What about Emageon's technology. Good or Great? Gaining market share? Windows/Oracle/Linux platform?

2) How much does a typical hospital or clinic pay per year for Emageon systems?

3) What do we know about Mr. Oliver, the M&A attorney?

4) What other investments/disvestments is Stanford working on?

I usually chat on Yahoo Finance message boards. Your blog is helpful.