A SPLITTING HEADACHE FROM A HEALTH-CARE MERGER
There were smiles all around when Abbey Home Healthcare acquired Total Pharmaceutical Care (TPC) last November for $197 million. Abbey Chairman Timothy M. Aitken saw TPC as a cornerstone of his expanding empire. TPC's boss, Victor M. Chaltiel, liked the idea of becoming Abbey's CEO--while clearing $6 million by selling his shares to Abbey. Even newly elected Los Angeles Mayor Richard J. Riordan had reason to cheer: Riordan's venture-capital firm helped launch TPC in the early 1980s. And the mayor's own investment in TPC, worth about $3 million when merger talks began in July, was now valued at more than $5 million.
Nobody is celebrating anymore. Since the takeover, Abbey, based in Costa Mesa, Calif., has been rocked by an unexpected write-down and anemic earnings that it blames squarely on problems at TPC. In the second quarter, Abbey's profits fell 8%, to $3.7 million, even though its revenues climbed 55%, to $118.5 million.
The fallout from the deal continues: On Aug. 5, Abbey sold its 51% interest in a unit that sells drugs to nursing homes for $21 million, money Aitken concedes Abbey needed to mitigate the financial damage from TPC. Abbey's stock, once a darling on Wall Street, has sunk 45% from its high on Feb. 11, to 17. And Abbey's changing fortunes have sparked an upheaval in management ranks. More than a dozen Abbey executives, including Chief Operating Officer Michael Miller, have left the company. Miller won't comment.
REAL VICTIM? And it doesn't appear that the bitter aftertaste of the Abbey-TPC deal will fade any time soon. Chaltiel, who was fired in February, filed suit against Abbey in Los Angeles Superior Court in April, alleging that the company never had any intention of keeping him on. Abbey denies the claim. Instead, Aitken says he's the true victim. In a complaint filed with the American Arbitration Assn. on July 5, Abbey claims that TPC executives, including Chaltiel, misled Abbey managers about the health of their company through improper accounting practices and bogus revenue projections. Chaltiel and other former TPC executives deny any wrongdoing. Abbey and Chaltiel have agreed to submit their complaints to arbitration.
Even Riordan finds himself caught in a potential public-relations mess. Although he isn't named in Abbey's complaint, the company alleges that an attorney at the mayor's former law firm and TPC's outside counsel, Riordan & McKinzie, acted improperly on Chaltiel's behalf. Specifically, Abbey claims in its complaint that Christopher Lewis, a Riordan & McKinzie partner and TPC director, approved $67,000 in questionable travel expenses for Chaltiel three days before the merger. Included in the expenses: a plane ticket for a vacation in France. Chaltiel denies the allegation, saying he reimbursed the company for his personal expenses.
Lewis, who manages the mayor's investments in a blind trust, couldn't be reached for comment. Meanwhile, Karen L. Rotschafer, Riordan's attorney, points out that the mayor was merely an investor in TPC and played no managerial role. "He's not losing sleep over this one," she says.
However the current corporate drama unfolds, Abbey's purchase of TPC is a cautionary tale of how oversized expectations can quickly turn to bitter disappointments in any merger. At first glance, TPC seemed to be the perfect vehicle for Aitken's ambitions. Abbey was growing rapidly in such areas as medical equipment and home respiratory services. But Aitken had long coveted a piece of the lucrative home-infusion business. By 1993, the $100 million TPC was one of the fastest-growing players in the market.
Aitken and Chaltiel agree that it was a troubled marriage from the start. Their operating styles seemed worlds apart. At 49, the British-born Aitken was more of a turnaround specialist than a health-care expert. His career included stints as a broadcasting executive and head of a hotel chain. The 52-year-old Chaltiel, a native of Tunisia, had spent his career in the health-care field, including 18 years as a senior executive at Baxter International Inc. After the merger, Aitken became chairman of the combined companies, while Chaltiel was named CEO.
Tensions quickly developed between the two. In negotiations leading up to the deal, Chaltiel estimated TPC's fiscal 1994 earnings at $24.4 million, up a healthy 60% from the previous year, claims Abbey. Later, according to Abbey's complaint, Chaltiel acknowledged "he had concocted [these figures] for the purpose of impressing analysts." Chaltiel denies that he was trying to mislead anyone and says his forecast was reasonable.
Aitken also grew annoyed that Chaltiel wasn't moving faster to sell Abbey's other services to TPC's HMO customers. At a strategy session "all sorts of things blew up," recalls one senior executive. "It ended with Victor shouting at Tim, `If you don't like the way I am doing things, why don't you just fire me?"' Chaltiel says he doesn't recall such an exchange.
Before long, everything from TPC's balance sheet to the size of Chaltiel's office became contentious issues at Abbey. Chaltiel complained his office was too small. But Abbey executives recoiled at his solution: He wanted Abbey Chief Financial Officer Richard J. Rapp to leave his office next door so he could knock down a wall to expand his office.
BAD NEWS. On Feb. 9, with the board's approval, Aitken fired Chaltiel "without cause." Along with his walking papers, Chaltiel received $1.2 million. In his suit, Chaltiel claims Abbey still owes him $6.4 million under terms of his contract. Aitken says Chaltiel isn't owed any money.
Getting rid of Chaltiel didn't end Aitken's headaches. In mid-March, Abbey insiders say, the company first learned that TPC had shifted $600,000 from a special reserve account and booked it as revenue just prior to the acquisition. Chaltiel says the transaction was legal and that the $600,000 was a windfall from a fund that had been set aside for taxes and never used. He also says the transfer was fully disclosed to Abbey.
The bad news iept coming. In late March, New York regulators notified Abbey that they had told TPC in May, 1993, that it wasn't licensed to provide nursing services to administer home infusion. Chaltiel had assured Abbey there were no problems in the New York operations before the deal, says Abbey's complaint. Chaltiel won't comment. In the end, Abbey closed TPC's two branches, citing the closings and other TPC-related problems in announcing a $10.4 million write-off on May 10.
Some analysts say that in his rush to close the TPC deal, Aitken may not have been as diligent as he should have been in studying TPC's books. Aitken insists he was deceived. He also says Chaltiel set conditions that limited his examination of TPC. "Utter nonsense," says Chaltiel. Still, Aitken says that once the mess at TPC is sorted out, the merger will benefit Abbey. As for Chaltiel, he has already raised $100 million from the bond market to launch a new company specializing in dialysis treatment at home. Meanwhile, Abbey's shareholders are still looking for a reason to smile.
A PAINFUL DEAL FOR ABBEY
NOV. 10, 1993
Abbey acquires Total Pharmaceutical Care for $197 million. TPC Chairman Victor Chaltiel named Abbey CEO. Timothy Aitken remains chairman.
FEB. 15, 1994
Abbey board, angered by slow pace of integrating the two companies, fires Chaltiel and agrees to negotiate severance package.
Abbey discovers TPC had shifted $600,000 from reserve account to make up for revenue shortfalls just prior to the acquisition, say Abbey executives. Chaltiel says the transfer was justified and fully disclosed.
New York State regulators inform Abbey that TPC branches lack proper licenses. Abbey closes the two branches.
Chaltiel files $6 million suit against Abbey, alleging breach of contract. Abbey contends contract has been fulfilled.
Abbey announces $10.4 million write-off, later citing problems at TPC.
Abbey files arbitration complaint against Chaltiel, alleging he misled the company about TPC's health. Chaltiel denies the allegations.
DATA: BUSINESS WEEKEric Schine in Costa Mesa, Calif.