Friday, April 16, 2010

'Splain Me Some More Ricky. . . By Mike Cannavo

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..

Income Statement

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

And this:


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….


Anonymous said...

The $41 million in prefereds sold to the 14 investors is money which will be redeemed in two years or less. These investors get 15% on their money, get their money back, AND get the 7 million newly issued common shares. Not a bad deal if you can get it.

The $200 million high yield offering (still don't know the coupon rate) is ahead of the prefered in the capital structure, but has no goodies attached.

If you read the investor presentation, you see that the new company will have 12% market share, and that the new owners project $15 million in cost savings. I think the question you are asking is, where exactly does Merge intend to find the $15 million? What's going to go?

BTW: I don't think MRGE is done, by any means. There are many more small companies in this space yet to acquire. They have also taken an interest in the EDC market and in the anasthesia IT market.

Anonymous said...

Not a bad deal if you can get it indeed. The question is will they get it?

If you look Merge turned a meager $285K profit last year on almost $67M in sales and much of that "profit" came from reduced $20M in overhead expense. The prior two years were heavy duty losses. If sales stay the same they would need to bring in an additional $10M just to repay the 14 investors their 15% premium. If they are higher the repayment is higher. AMICAS stock hasn't exactly set the world on fire either and the combined expenses associated with merging both companies will negatively impact the bottom line for at least the next 12-18 months if not longer.

12% market share? Pass that doobie this way please. Not a chance in hell. 5% would be highly commendable.

I've been in the PACS marketplace nearly 30 years and seen a lot and what is going on here simply defies logic...but then who said logic ever had anything to do with the investment world? That is why the mere pittance I have managed to save is in day of deposit day of withdrawal accounts- and I have no worries of it exceeding the FDIC's guarantees either.

Oh, and the $15M? If the buyers on hand for some of these products are serious they can write a check for the remaining balance due like the Dalai and I go out and buy lunch. It's just a question of how serious they are now...

I wish everyone well here. Should be interesting to see how this all plays out.


Anonymous said...

Here's the relevant page of the investor presentation:

It says:

GE 19%
MCK 16%
Phillips 15%
Fuji 9%
Agfa 9%

Other 20%

Merge is likely to go after some of that "other".

Anonymous said...

Thanks for the link. It’s fascinating "information" although largely incorrect. There is also a lot of conflicting and inaccurate data in the presentation as well but you have to know the marketplace to understand this. Needless to say the Dalai and I had a few good belly laughs for sure.

Understand reports like those cited exist purely to sell reports and to have investors buy into a market they really don’t understand. Most of the people selling these reports wouldn't know a PACS if it bit them in the a$$. Heck they can't even get the name of PACS right as slide 14 ( c57327c57327z0010.gif) shows calling it a "Picture archive retrieval system". PACS or PARS? Which is it (laugh)?

This was not Merge’s issue- its the “garbage in garbage out” cycle of data that is out there to sell investors on, pure and simple. All companies like Merge and others are doing is getting “facts” from people who are charging $5-10K for a report and presenting the "information" contained therein in a way that is positive. And people are buying it hook line and sinker.

In Italian there is a saying “Uno sciocco e il suo denaro son presto separati”. Look it up and you’ll understand how I feel about investor presentations.


Anonymous said...

The bonds were sold today, yield 12.5% (coupon 11.75%), so the investors were somewhat skeptical. I'd be interested to know which parts of the investor presentation you would dispute, besides the 12% figure.

Anonymous said...

"Somewhat skeptical." I love it!! Reminds me of one of my favorites quotes from the movie Absence of Malice "You had a leak? You call what's goin' on around here a leak? Boy, the last time there was a leak like this, Noah built hisself a boat." Yeah I'd be VERY skeptical too be it my money or someone elses given what is shown here.

I'd love to take apart the presentation slide by slide for you and show you the reality behind the presented "facts" but that is what I do for a living. I will tell you that, from my perspective, more than half of what is up there is pure fantasy- documented fantasy, mind you- but fantasy nonentheless, so caveat emptor.

I perform an average of two investor calls per week dealing with stuff like this so I'm sorry to say I just can't do this for free. My investment clients say my input is worth its weight in gold because they haven't a clue about the realities of this market while I live in it every single day.

Get a few of your other investor friends together and give me a call at (407) 359-6575 and we'll schedule an hour to go over the presentation. You can then ask me whatever you want as long as it doesn't impinge on proprietary or confidential areas.

Hope to hear from you.


Anonymous said...

Sorry Mike, but you've been down on this deal since day one. MRGE stock is up 30% from the low around $2 a few weeks ago. Of course they are going to shine up the investor presentation a bit. Fact is, there are no other consolidators in this sector, and the big boys aren't interested in acquiring the remaining small fry. Mr. Ferro is engaged in a risky but potentially very rewarding exercise here. He's being advised by Glen Tullman who, as you know, is certainly no slouch when it comes to HCIT.

Anonymous said...

I don’t deny that I have been down on this deal since day one because IT MAKES NO SENSE!!! Thoma Bravo made sense, this deal doesn’t.

Yes the stock price may be up 30% from a few weeks ago but it’s also right where it was in mid-February (a mere 8 weeks ago) and still nearly almost half of what the stock price was in November, 2009 (a mere 5 months ago). So keep drinking that Merge Kool Aid.® and interpret the "facts" as you see them…

“Shine up the investor presentation a bit?” Excuse me while I go change my pants (laugh). The investor presentation “creatively interprets” expensive and hard bought facts from research companies whose survival largely hinges on the sale of these reports to companies to include this type of data in investor presentations. Again, believe what you will and invest where you will. Just don’t come crying to me when you lose your a$$. That said, I have ALWAYS said that Merge marketing and PR is second to none and this investor presentation once again reinforces that fact. Merge’s marketing is incredible…

Most of the existing big boys don’t need another PACS and are smart enough to know that any time you offer two competing products in the same marketplace both suffer. I can get you a list of at least 6 companies who learned this the hard way in the past few years from GE on down. Someone also needs to remind Merge that that happened when they bought e-Med a few years back- unless they deny that happened that is.

I don’t know Mr Tullman but am impressed that Allscripts stock rose from $5 to $20 in just about the same amount of time that Merge’s went in the opposite direction with about the same results. Of course before Misys hit the bottom at $5 it was up at $15….shades of Merge all over again (laugh)…but I don’t follow their stock so I have no idea what was behind that either. That said, I have also seen several mistakes that Misys has made trying to enter into PACS market dating back to 2003 with an eRad/Image Medical offering and have seen their lack of a product offering in this current market since then as well. To the best of my knowledge the only product Misys offers is the PACS arena is the PIM® and sales of it aren’t exactly setting the world on fire either. I wonder how much of Mr Tullman’s $1M 2009 compensation he is willing to invest in the Merge deal? Now THAT is the mark of a confident man…(laugh). That said though, he has a VERY impressive background and done a lot more in his 50 years on this planet than I have- so kudos to Merge to reaching out to someone who obviously knows the HIT sector well. Now if they would just reach out to someone like myself or the Dalai who know the PACS marketplace well this would serve everyone.

Lastly, “risky but potentially rewarding exercise”? For whom? The investors? Merge leadership? AMICAS and Merge both? How about for the end users of both companies. Now THAT is where risk comes into play…and where my biggest concern lies.

The Dalai and I are still standing by the phone waiting for Mr. Ferro’s call- without having to sign away our first born male child via NDA’s just to chat with him either. That might change my mind about the company- but I doubt it. Of course I’m still waiting on Morgan Stanley’s call too…and if they bailed on the $200 bridge loan because of what we posted the Dalai and I want our 10% finders fee- or 5%, 2%, 1%, a ham and Swiss on rye hold the mayo- just give us something for saving them from what I feel is sure financial ruin.

Stay tuned. It only gets better.