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Healtheon, WebMD to merge
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May 20, 1999: 2:29 p.m. ET
Online health services to link up; Microsoft to take stake worth $250M
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NEW YORK (CNNfn) - Hoping to corner the growing market for online health care information, two fledgling Web companies said Thursday they will merge in a stock swap worth at least $7.9 billion - a deal backed by Microsoft Corp. and other technology heavyweights.
Santa Clara, Calif.-based Healtheon Corp. (HLTH) and privately held WebMD Inc. of Atlanta would each hold 50 percent stakes in the combined entity. Healtheon was co-founded by chairman James H. Clark, co-founder of Netscape Communications and Silicon Graphics (SGI).
The companies billed the venture as a consolidated Web-based medical services company that provides health care information to consumers and doctors.
The new site would build on the existing WebMD format, in which consumers can surf the network for free to research information about diseases or participate in patient support groups. Doctors who pay to subscribe can use Healtheon's extensive automated system to organize billing and do other paperwork.
Microsoft (MSFT) will be the largest investor with a $250 million equity commitment, the companies said. The software publisher also is underwriting $150 million in doctor subscriptions and $100 million in commitments to sell advertising and sponsorships. Microsoft will use content from the Web site on its MSN Internet network.
In addition, Web portal Excite Inc. (XCIT) plans to invest $25 million. Intel (INTC) also will be an investor. Healtheon already has a deal with DuPont Co. (DD) in which the chemical company underwrites physician subscriptions and advertising guarantees.
Shares in Healtheon, which already had been rising steadily since reports of the merger surfaced last week, rocketed after the announcement. The stock was trading up 36-1/8 at 116-3/8 after the announcement in early afternoon trading.
The companies did not provide a dollar value for the merger, but said that 1.815 Healtheon shares will be exchanged for each WebMD share. There are 54 million fully diluted shares of WebMD stock outstanding.
Based on Thursday's stock prices, the deal would be worth at least $11 billion; however, based on Wednesday's closing price of 80-1/4, the deal would be worth $7.9 billion. Reports earlier in the week valued the deal at $5.5 billion.
The rise of Healtheon stock
in the past week.
WebMD isn't publicly listed. The Atlanta-based company has a partnership to provide content to CNN.com and CNN has a minority stake in WebMD.
The new company will be called Healtheon/WebMD, based in Atlanta and marketed as the WebMD Internet site.
"We intend to leverage our powerful business model and build the largest most successful Internet health company in the world," said Jeffrey Arnold, WebMD's 29-year-old chief executive, who will become CEO of the merged company. "With this merger, health has a home page."
In the red
Like many other young Internet companies, both Healtheon and WebMD have yet to turn a profit. But that apparently isn't a concern for the companies' big-time investors, who see huge potential in the online health business. More than $1.2 trillion is spent on health care in the United States each year.
"Just the size of the health care market is enormous -- 14 percent of the U.S. GDP last year," said David Restrepo, health care analyst at Jupiter Communications, an Internet research firm. "That number will get anyone's attention from Bill Gates on down."
Just as consumers now use the Internet as a platform for investing and arranging travel, "health is kind of the next challenge out there," Restrepo said.
In a statement, Microsoft said it sees the Internet "playing a very important role in accelerating communication and overall customer service in the health care field."
There are numerous health information Web sites around, including Adam.com and DrKoop.com, as well as sites catering to doctors. But this venture aims to combine both, trying to attract some of the approximately 730,000 doctors in the country to its automated network. The companies said that $250 billion is wasted in the health care industry each year by duplication and excess paperwork.
But analysts question whether the venture as envisioned can turn profits. Healtheon, which went public in February, posted a loss of $18.6 million, or 30 cents per share, in the first quarter. WebMD lost $7.8 million on revenue of $75,000 for the first nine months of 1998.
Restrepo said that to earn money aside from doctor subscriptions, he anticipates the merged company to launch or buy an online drugstore service or some other type of health-related electronic retail venture.
"They will have to offer commerce, everything from vitamins to prescription drugs," he said.
The deal, which would require regulatory and shareholder approval, would divide the combined company's shares 50/50 between Healtheon and WebMD shareholders, after taking into account Healtheon's pending acquisition of electronic data company MEDE America Corp. (MEDE), the companies said.
Healtheon and WebMD each will have four members on the new board. Microsoft will have one board member.
'Brand leadership'
In February, Healtheon filed papers to go public on Wall Street but withdrew the application last week. In its IPO application to the Securities and Exchange Commission, WebMD outlined its strategy. It said that online health information is one of the fastest growing sectors of the Internet and that it believed that "the first company to establish clear brand leadership" will be able to capitalize on "revenue opportunities, including recurring subscription, advertising and sponsorship revenue."
Healtheon said Clark, its co-founder, will serve as a member of the board of the new company. Asked Thursday about the new company's alliance with Microsoft, which is embroiled in a federal antitrust case in which it allegedly tried to quash competition from Netscape, Clark said that working with Microsoft posed no problem.
The lawsuit "didn't play a role in Microsoft's part or our part," he said. "Business is a very dynamic thing and you have to do the right thing for business and shareholders." 
-- by staff writer Martha Slud
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Healtheon Corp.
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