The document summarizes a large merger and acquisition deal between McKesson and HBOC that set a new high in financial terms at $14.5 billion but ultimately unraveled due to accounting issues. The combined company had significant client reach but its stock prices plummeted over 50% when it was found they had to restate earnings. In the following year, the company continued to report worsening headlines and downward spiral until the deal collapsed.

1. H.I.S.-tory
by Vince Ciotti
Episode #120:
McKessonPart 8 =
The Deal!
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© 2014 by H.I.S. Professionals, LLC, all rights reserved.

2. Deals to Date
• Below is a visual recap of the
dozens of HBOC deals to date:

3. The Biggest Deal in HIS-tory!
• We’ve covered scores of mergers & acquisitions (M & As) during
these 100+ HIS-tory episodes, but the next one involving HBOC
was easily the biggest& “baddest” acquisition in our industry.
• Some of the other big M & As include:
- Siemens acquiring SMS for ≈$2.1B
- Allscripts buying Eclipsys for $1.35B
- NTT Data acquiring Keane for $1.2B
- GE buying IDX for $1.2B
• Indeed, HBOC had already spent a ton:
- CliniCom came in about $190M
- FDC (Amex/SAI/Mac) cost $125M
- IBAX was a bargain at only $45M…
• So the $14.5B deal between McKesson and HBOC set a hew high
in financial terms, and a new low in moral & human terms…

4. Role Reversal
• As an indication of just how big HBOC’s appetite for acquisitions
had become by 1998, in July of that year, the two firms began
discussion of a potential deal that would have seen HBOC (annual
revenue of ≈$1.5B) acquiring McKesson (≈$20B in revenue)!?
• Word of that deal leaked out ending
the talks, causing HBOC’s stock to
tank 22% in 2 days. HBOC’s weakened
stock price caused the roles to be
reversed in subsequent talks, which
this time were kept under wraps.
• The companies announced their definitive
“merger” agreement on Oct. 18 under which
Charlie McCall would become Chairman of
the new McKesson/HBOC, with McKesson’s
Mark Pulidoas the the President & CEO.

5. Birth of an HIS Giant
• The combined firms had an
enormous client base:
– HBOC had 2,800 hospitals on
its many diverse systems
– McKesson sold drugs &
supplies to over 2,200 US
hospitals.
• The two also sold to 25,000 retail
pharmacies, 35,000 physician
practices, 10,000 extended care
sites, 600 payors, 450 drug
manufacturers and 2,000
medical-surgical manufacturers
• Ittruly was an industry facelift:

6. The Unraveling Begins
• Initial reaction from Wall Street was surprisingly cool, with
HBOC’s stock off 3.5 on NASDAQ, down to 26 & 1/8, while
McKesson’s remained flat at 88 & 11/16 on the Big Board. Meh…
• In April, 1999, a routine
audit turned up major
problems - see right:
• When word leaked that
McKesson/HBOC had to
reinstate earnings, its
stock plummeted 50%...
• And just who had been
HBOC’s audit firm?
• Just think Enron A
A little bit later…

7. Armageddon
• This sad series of images recounts
McKesson/HBOC’s downward spiral over the next
year:

8. Armageddon, cont’d
• And the headlines kept getting worse:

9. Unique?
• It’s sad how little we remember of past history… Scandals such as
McKesson/HBOC’s shock us to the core, then are forgotten in a
nanosecond as the next news/tweets/likes hits our screens.
• Remember “HIS Insider” that
tried to go on-line years ago,
before the era ofinteractive
blogs like Mr. HIS-Talk’s?
• They pointed out in this
piece a number of 2003
lawsuits, as almost every
vendor out there has been
enmeshed in some sort of
scandal over it HIS-tory…
• McKesson/HBOC was just
the largest and got caught!

10. Takeaway?
• It’s a little hard to make light of such a sad turn of events, but
there is one interesting way to look at the McK/HBOC scandal.
• Ever heard from tech friends in other industries how “behind”
healthcare is compared to others? Well, tell them about this:
• Next time you hearhow behind we are,
point out to your non-healthcare friend
how our industrybeat the whole country
to the punch when it comes to accounting
scandals: the 1999 McK/HBOC
debaclepredated Enron in 2001 by a full 2
years, and even involved the same audit
firm!
• Another interesting perspective: most vendors’
fiscal year end is New Years eve, except a few:
like Siemens = 9/30. McKesson’s is March 30,
so their fiscal year starts on April Fools Day…