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Grabbing Mede America When It's Down

Given that Healtheon has promised to buy the company, you'd think Mede's shares would be worth more.

A curious sidelight to the merger between Net-stock darling Healtheon (HLTH) and fledgling medical portal WebMD is the fate of an earlier Healtheon acquisition target, Mede America (MEDE) . Depending on how well investors can gauge Healtheon's commitment to buying Mede America for the minimum amount it promised to pay, buying shares of Mede now could make for an easy profit in weeks to come.

Healtheon struck a deal in late April to buy Mede America, an East Meadow, N.Y.-based electronic processor of medical documents for 60,000 physicians and other healthcare providers. The value of the deal at the time was $460 million, based on an exchange ratio pegged to Healtheon's stock price of 45 11/16. But as Healtheon's stock has swooned -- it closed Thursday at 34 1/8 -- so too has Mede America's. In fact, Healtheon's stock price has fallen below a "collar" level meant to protect Mede America's shareholders.

It's a strange collar, however, because it gives Heatheon some rights too. To boil down a complex formula, if Healtheon's stock falls below 38 11/16, Healtheon may offer Mede America shareholders a better exchange ratio, one that would pay a minimum per-share price of 25 1/2. (That's the "floor" value of Mede America's shares at the exchange ratio of .6593 for each share of Healtheon at 38 11/16.) If Healtheon does


pay Mede America at least 25 1/2 per share, Mede can walk away from the deal. These prices are based on Healtheon's average 10-day closing price two days before the merger closes.

Healtheon announced its Mede America deal a month before the WebMD merger, and subsequently Healtheon disclosed plans to buy another company, health news provider


. And according to comments Healtheon CEO Michael Long made Thursday in a conference call with analysts to discuss second-quarter financial results, Healtheon has begun integrating all its acquisitions before they are completed. That includes Mede America, which Long praised as having "huge potential" for Healtheon/WebMD, as the new company will be known.

So, given that Healtheon publicly is confident it will buy Mede America, you'd think Mede's shares would be worth somewhere between 22 1/2 (applying the current exchange ratio to Heatheon's shares) and 25 1/2, the supposed floor. But they're not. Mede's shares closed Thursday at 20 1/8 after trading as low as 15 5/8 on Tuesday.

"The Street is assuming that Healtheon might try to renegotiate this deal," says Ray Falci, an analyst with

Bear Stearns

, which co-managed Mede's initial public offering in February. "I'd be very surprised if this deal fell through, though some of the arbs seem to think it will." (Arbitrageurs are investors who make big bets on relatively small swings in stocks, often of companies involved in uncompleted transactions.)

But what if, as Falci believes, the deal gets done? "Then it looks like you have at least two free bucks," he says.

Healtheon is mum on its intentions regarding Mede America, which is understandable considering the deal isn't expected to close until late September at the earliest. The stock could move back comfortably above the collar by then or be so low that all bets would be off. "Both boards are committed to making this deal happen," said a spokeswoman for Healtheon Chief Financial Officer John Westermann.

Adds Richard Bankosky, CFO for Mede America, of the exchange ratio Healtheon will pay: "They consider us crucial to the deal. We're a long way from this decision having to be made."

Healtheon will continue to be a yo-yo at least until the deal goes through, and likely for a while after. Shares of the Santa Clara, Calif., company -- which is assembling an Internet-based network connecting doctors, their patients and medical suppliers -- plunged earlier in the week when the six-month lockup restriction on employee stock selling expired.

The lockup expiration is important because Healtheon has such a tiny float, the number of shares available to be publicly traded. Until recently, the float had been five million shares, about 7% of shares outstanding. The float and the share count stand to increase dramatically after the various mergers close. Healtheon CEO Long told analysts Thursday an additional 40 million shares will be freed up for trading then.

Long put a postive spin on that development, noting that institutional investors have been "very frustrated" by their inability to build up significant positions in Healtheon.

If he's right, and if the stock remains low, institutional investors will get their opportunity to buy Healtheon's shares come late September or early October. The question for investors is whether or not buying Mede America stock now offers an inexpensive way to get into Healtheon right away.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at