Why, Bless My Soul, If It Isn't A Takeover BattleMark Maremont and Larry Armstrong
Talk about life imitating art. Timothy Aitken, chairman of Abbey Healthcare Group Inc., was watching the Mar. 20 TV broadcast of Barbarians at the Gate while musing about a real-life merger of his own. For months, he had been quietly trying to arrange a marriage with Lifetime Corp., a much larger provider of home health-care services. Lifetime had rebuffed the overtures, and Aitken was at a loss. Suddenly, he was inspired by the fictionalized Henry R. Kravis. Asked about his next move in the on-screen takeover fight, Kravis utters one word: "Napalm."
Two days later, Aitken unleashed his own version of napalm: a $220 million surprise offer for Lifetime. Although not a formal bid, it's as close as Wall Street lately has gotten to a hostile takeover. In a Mar. 30 letter, Lifetime Chairman Anthony H. Reeves rejected the bid as "inadequate," and vowed to stay independent. Lifetime also poured scorn on its smaller suitor. "These guys aren't Barbarians at the Gate, they're mice nibbling at the bottoms of the gateposts," snorts a Lifetime adviser.
BIG WRITEOFF. Nonetheless, Lifetime may be vulnerable. The Boston-based company has lost credibility with many of its big shareholders. Their complaints: Despite rapid revenue growth, Lifetime has a poor earnings and stock price record. During the past five years, it has posted total net profit of less than $9 million on total revenues of $3.1 billion. Management blunders also have riled shareholders. Among them: overpaying for a British temporary-help agency far flung from the core business. That cost Lifetime a $43 million writeoff in 1991, and it has yet to sell the unit, despite many tries. Reeves says the problems are solved. "We have absolute confidence that the results quarter by quarter will reinforce that view," he says.
Despite their shaky performance, though, Lifetime's top brass reaped outsize pay packets. Over five years, the compensation of Reeves and Michael J. Sinclair--Lifetime's two founders--has totaled more than $14 million. That includes $6.3 million to settle Sinclair's contract when he left last year after losing a board showdown with Reeves.
Top executives also have received generous stock options. In May, 1990, for example, Sinclair, Reeves, and Chief Finance Officer Barry P. Coombs were granted options on 1,175,000 shares at the then-current price of $30.25 per share, exercisable over five years. That raised eyebrows, given that Lifetime only had 8.6 million shares in circulation
Lifetime's stock soon tumbled to under $20, but no matter. The board canceled the prior options and issued the same number of new ones at $18.75 a share. Outside experts call that highly unusual. A. Camille Nichols, CEO of Investors' Fiduciary Services Inc., an Atlanta proxy consultant, says the option package seems large for a company of any size. And, she adds, "to reprice them on top of that is frankly alarming. It appears as though they took advantage of a dip in the stock price."
Reeves defends the executive pay packets as reflecting contracts signed when Lifetime was small. He also notes that he got no bonus in 1992 because of the company's poor performance--just a $725,000 salary plus $45,000 in perks. The company, meanwhile, netted only $5.2 million on revenues of $885 million. Reeves won't discuss the options, saying "it was a judgment of the board."
Reeves and Sinclair, both natives of Britain, started Lifetime in 1986, using borrowed money to buy a series of agencies that provide in-home nursing services, mainly to the elderly. Now, Lifetime's major subsidiary, Kimberly Quality Care Inc., is No.1 in its niche.
The trouble is that the margins in Kimberly's low-tech end of health care are slim. Lifetime tried to move upmarket to provide intravenous drug treatments at home, but pulled back because of stiff competition and insurers' growing demand for price cuts. Last year, Lifetime restructured, firing 68 IV salespeople and closing 20 branches. Gripes Leonard Green, a Freeport (N.Y.) consultant who founded Quality Care Inc., one of the companies merged into Kimberly Quality Care: "They've been getting into businesses that the rest of the industry is trying to get out of."
LAVISH PERKS. One of Lifetime's problems may be its hands-off management. Despite his high salary, Sinclair was rarely seen at headquarters, former employees say--though Sinclair counters that he often traveled on company business. Reeves, a keen golfer, is often seen on the links or at his Cape Cod house. Former employees say he spent at least a quarter of his working hours on vacation or recreation--more during the summer. Reeves calls that "blatantly untrue" and says he puts in long, six-day weeks.
Perks at Lifetime have been lavish, costing the company up to $65,000 a year for each top executive. Its headquarters, in a pricy office tower, has a private gym. And former staffers say Reeves frequently hopped the Concorde to Britain, where Lifetime has operations and his family lives most of the year. Until recently, a company-owned Mercedes and driver picked up Reeves most mornings, even though he lives only three blocks from Lifetime's office. Reeves says he used the car for that purpose infrequently and says the car and another in London were sold last year. He adds that he takes the Concorde only occasionally.
WATERLOO? Lavish perks or not, Aitken believes Kimberly would be a good fit with Abbey. The company, based in Costa Mesa, Calif., which earned $10.4 million on $249 million in revenues last year, provides home medical equipment and services such as respiratory therapy. Together, the companies would have the country's largest home health-care network, with more than 600 branches. Reeves counters that Lifetime is poised to benefit from expected health-care cost-cutting under President Clinton, and claims Abbey is trying to snare a deal just as the company is rebounding.
Aitken threatens a proxy fight. Lifetime's May 19 annual meeting is showdown time, he says. "On May 19, Mr. Reeves's Waterloo is staring him in the face," Aitken says. Meanwhile, market watchers hope for another bidder. Mice at the gate or barbarians, it's still a good old-fashioned takeover fight.
A GRAVY TRAIN AT LIFETIME, DESPITE WEAK PERFORMANCE 1988 Sinclair and Reeves each make over $500,000 in salary and bonus. Company posts net of $5.4 million on revenues of $377 million. 1989 Lifetime net falls 8%, to $5 million, on revenues of $456 million. Sinclair and Reeves get 40% raises. 1990 Lifetime earns record $17.7 million on $610 million in revenues. Sinclair and Reeves make $1.2 million. In May, each is granted options for 500,000 shares at $30.25, the prevailing price. By October, the stock drops to under $20. The options are revoked. They receive 500,000 new options at $18.75. 1991 Lifetime loses $25 million on revenues of $779 million. Reeves and Sinclair earn more than $1 million each, plus more than $60,000 each in perks. 1992 The stock starts a long slide to below $10. Sinclair falls out with Reeves. He departs with a $6.3 million payment. 1993 Abbey offers $23.50 per share, or $220 million for Lifetime. It is rejected.
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