Synetic also in billion-dollar deal

Healtheon, WebMD merger leads the web portal race

By DON LONG
Healthcare InfoTech Managing Editor

In the scramble to forge the foremost healthcare Internet site, WebMD and Healtheon appear to have grabbed the portal pole position.

The two companies on Thursday acknowledged what had been rumored earlier in the week: That they will combine in an attempt to develop what has been termed a "one-stop" group of Internet services for the healthcare industry via web portal with particular focus on targeting the U.S. physician market. The value of that merger has been estimated at $5.5 billion.

In a statement Thursday, WebMD said that the new company "will be the first end-to-end Internet healthcare and e-commerce company." It will combine, according to WebMD, its "established brand name" with Healtheon’s "proven transaction platform."

The news appeared to trump another billion-dollar deal made just days earlier. On Monday, Internet developer Synetic (Elmwood Park, NJ) announced it was buying Medical Manager (Tampa, FL), a medical practice management software firm, in a stock deal valued at about $1.3 billion.

That pact appeared to give Synetic the lead in the race to link the nation’s doctors and their desktop computers with health plans, clinical labs, pharmacy benefit managers and other healthcare players in an online network. Synetic will have access to an estimated 120,000 doctors who use Medical Manager’s software. In addition, Medical Manager has developed a network of 2,000 sales representatives, technical support staff and dealers to market and conducting training for Synetic’s system.

But the Healtheon/WebMD deal, besides having much greater initial value, has some other support that appears to give it a major upside potential. Specifically, the combination has the backing of various Goliaths of the computer industry. Biggest of all is Microsoft, which is committing $250 million to the merged firm and has agreed to underwrite $150 million in physician subscription commitments in the form of "five million subscription months over a five-year period," according to WebMD. Additionally, Microsoft is committing $100 million to sell advertising and sponsorships on co-branded sites over the next five years.

Lining up behind Microsoft are Excite, Intel, Covad, Softbank and Superior Consulting, which are among a group of companies that have committed more than $360 million in additional funding to back the growth and development of Healtheon/WebMD.

The Healtheon-WebMD deal will be consummated as a stock swap, with 1.815 Healtheon shares exchanged for each outstanding share of WebMD stock. At closing, about 50% of the combined company’s fully diluted shares will be held by existing WebMD shareholders, and 50% by Healtheon shareholders.

Michael Long, Healtheon CEO, will be chairman and COO of the new company, and Jeff Arnold, WebMD’s CEO, will hold the same post with the merged firm. Healtheon’s co-founder and chairman, James Clark, will be a member of the new company’s board.

The Healtheon-WebMD and Synetec-Medical Manager mergers were termed "mirror-image deals" by Lloyd Greif, president of investment bank Greif & Co. (Los Angeles). Greif told Reuters News Service that the consolidations were "a clear sign that the industry is heating up rapidly."

The new deal also appeared to validate a recent change in growth strategy by WebMD. The company had filed for an initial public offering, but withdrew its registration last week, saying that it would pursue a strategy that did not involve going public. Besides gaining the support of Microsoft and other computer biggies, WebMD in recent weeks has put together several hundred million dollars in physician subscriptions and advertising guarantees. It is predicting a 500 million annual transaction run rate and 28 billion Internet impressions in its initial operations.

Healtheon went public in February and, like WebMD, has yet to turn a profit. The new company, according to WebMD, "will connect physicians, medical institutions, consumers, labs, pharmacies and payers with comprehensive products and services for managing information, communications and transaction processing."

Commenting on the merger, Arnold described the business model as a "combination of subscriptions" that is "highly compelling. "[We] will have unsurpassed connectivity and power to effect transactions among doctors, healthcare institutions, consumers and payers.

"We are particularly excited because the two companies are highly complementary and together they will have an impressive portfolio of relationships with many leading names in healthcare and technology."

Both Healtheon and WebMD have bloomed like overnight mushrooms in the recent hothouse environment of Internet stock growth and IT consolidation. Arnold formed WebMD just last year, and Healtheon was launched in 1996 by Clark, a founder of Silicon Graphics and Netscape Communications.