Syncor payments raise doubts about its proposed acquisition

Investigation finds some payments appear illegal

The planned acquisition of radiopharmacy operator Syncor by Cardinal Health (SCAN 6/26/02) hit a snag earlier this month when Cardinal discovered what may be illegal payments made to overseas Syncor customers. The problem was uncovered as part of Cardinal's due diligence analysis before finalizing the proposed stock-swap purchase.

Syncor chairman Monty Fu and his brother, Moses Fu, director of the Asia Region for Syncor Overseas Ltd., were placed on paid leave pending results of an investigation by a special committee of the Syncor board of directors working with outside counsel and an independent forensic accounting firm. Meanwhile, on Nov. 15 Syncor was forced to request a five-day extension in filing its quarterly 10-Q report to the Securities and Exchange Commission.

In its 10-Q document, filed Nov. 19, Syncor cited findings by its special committee that at least some of the estimated $500,000 of questionable payments made to customers in Taiwan appear to violate U.S. laws, specifically provisions of the Foreign Corrupt Practices Act of 1977. They also appear to violate Taiwanese law. And there may be more problems.

The committee, according to Syncor, has found evidence of questionable transactions in at least six other countries in Asia, Latin America, and Europe. These payments, like those in Taiwan, may have violated U.S. and local laws. The committee has also uncovered additional instances in which activities of Syncor, its subsidiaries, or representatives may have violated local laws and regulations relating to tax, competition, and regulatory matters.

Syncor executives maintain that the questionable practices uncovered are not expected to have a material effect on the financial results of Syncor and, therefore, are not expected to result in an adjustment or restatement of Syncor's historical financial statements. (The company had sales of $775 million in fiscal 2001.) Cardinal Health of Dublin, OH, has indicated, however, that there is no assurance the acquisition will be completed, given the current uncertainties. Apart from potential legal liabilities and reputation problems, the controversy has changed the relative values of the two company's stock shares.

Syncor's stock price dove to under $20 per share following the payment revelation, although it recovered some value last week, hovering at around $25. The stock again plummeted when the 10-Q was made public, but soon recovered to about $23 per share. Before these problems surfaced, Syncor stock had traded in the $35 range. Cardinal's stock price, on the other hand, has been stable, trading at around $65.

Syncor executives hope to have all the facts in hand before its shareholders meet to vote on the Cardinal acquisition on Dec. 6, said Syncor spokesperson Joe Bunning. The shareholder vote was postponed from Nov. 19 due to the payments investigation.

"The committee is investigating the payments that they know were made to see if there was any wrongdoing, as well as searching for other payments and who was involved in them," he said.

The results of the investigation will be given to the SEC and the Department of Justice, both of which have already met with Syncor regarding the recent revelations. Syncor has set aside $2.5 million to cover fines and other penalties that may be imposed by the SEC and the DOJ, but the company stated that there is no assurance this will be enough.

In initial discussions about the acquisition, Cardinal indicated that its primary interest was in merging Syncor's large chain of U.S. radiopharmacies with its own radiopharmacy business, according to William Powell, Syncor director of investor relations. Cardinal is a global healthcare supplier with more than $44 billion in annual revenues.

Cardinal CEO Robert Walter told analysts following the announcement of the deal that the imaging and international businesses would be sold off. Syncor has been looking for a buyer for its medical imaging center business in preparation for the merger of its radiopharmacy business with that of Cardinal.