Maxum and American Health merger will create imaging services giant

Deal may signal era of collaboration with OEMs

Imaging services firms Maxum Health and American Health Serviceshave agreed to merge in what executives of both companies sayis the first step toward a strategy of consolidation. Glenn Cato,president and CFO of Dallas-based Maxum, describes the deal withAmerican Health of Newport Beach, CA, as one that will lay thegroundwork for future acquisitions in the mobile and fixed imagingservices market.

"Two companies that have had troubled pasts financiallywill now create one company that will have a financial foundationmuch stronger than either of the two companies individually,"Cato said. "That will give us an opportunity to be activein consolidating the industry and acquiring other companies."

The combination of Maxum and American Health will constitutea significant entity. Maxum operates six fixed-site imaging centersand 55 mobile MRIs. American Health has about 24 fixed-site centers.

But neither the size of the merged assets of this new company,to be called InSight Health Services, nor its strategy to acquireother such assets in the future is the only notable aspect ofthe deal. Potentially overshadowing the consolidation angle isa fundamental change in the traditional relationship between healthcareprovider and equipment vendor.

Behind the scenes of the merger is GE Medical Systems, whichhas obtained a substantial block of preferred stock in the newcompany.

"It is certainly the first case, to my knowledge, wherea vendor has ended up with a significant equity position in aprovider company," said Larry Atkins, president and CEO ofAmerican Health.

That equity position is so large, in fact, that if GE wereto convert its nonvoting preferred stock into common stock --as it has the right to do as part of the agreement -- GE wouldhold 48% of the new company.

GE has maintained close relationships with both Maxum and AmericanHealth. Much of the MRI equipment purchased by the two providershas been from the Milwaukee vendor. Those purchase agreements,as well as leases, put GE in the position to negotiate a placein the pending merger. GE's contribution to the merger is complicated,Atkins said. It includes leases and other concessions, as wellas some conversion of debt to equity. Specific terms of the dealhave not been released.

Having GE as a major owner of stock could put InSight Healthin the awkward position when negotiating future equipment purchasesor leases of trying to wring price concessions from a major equitypartner -- or even choosing another vendor over GE. If all aspectsof a future equipment deal are equal among the vendors, thereis no question that the deal will go to GE, Atkins said.

"Clearly, we are going to have a very close working relationshipwith GE," he said.

GE will not, however, be a shoo-in on every deal, he said.The hospital being wooed by InSight for its business will havethe ultimate say in what equipment is chosen.

"If a hospital absolutely wants a different piece of equipmentand it is a chance for InSight to make some money, GE understandsas an equity holder that our first concern is to make money,"Atkins said.

Such decisions, if they occur, are at least several monthsoff. The proposed merger is subject to certain conditions, mostimportantly a vote of American Health and Maxum shareholders andSecurities and Exchange Commission approval. Prior to making theproposed deal, Maxum settled claims that had been filed earlierby its shareholders as part of a class-action suit.

If the deal goes through, shareholders will reap not only thebenefits of debt and lease restructuring from GE but also costsavings in the reorganization of the two companies. InSight'soperations will be streamlined and corporate headquarters willbe consolidated in Newport Beach. An immediate result will bea change in title for Atkins and Cato, each of whom serves aspresident of his company. Atkins will be president and CEO ofInSight; Cato will be senior executive vice president and COO.

Another benefit of the merger is improved coverage in certainregions of the country, which will increase InSight's leveragein negotiating managed-care contracts.

"You have to have critical mass," Atkins said. "Youhave to have geographical coverage."

If the deal goes through, InSight will have both. The new companyshould be able to compete effectively in several regions: California,the Midwest, eastern seaboard states, and southern states, Atkinssaid. The main thrust in those regions will be to meet the emergingneeds of managed-care organizations, which are demanding one-stopshopping, he said.

"They are telling us, `Let our patients call one numberfor scheduling, let us get one bill, let one company do utilizationmanagement,'" Atkins said. "They're asking, `Why can'tI deal with one prime vendor?'"