Shares of online healthcare services provider



fell Tuesday, a day after the company priced $300 million of convertible debt, which it said might be used to fund acquisitions.

That's what analysts expect will be the result of the sale. The stock was recently down 7.9% to $7.25, but some experts think it's a good time to buy, particularly if the company is planning to use the funds for an acquisition that could boost its results. Convertible deals such as the one WebMD is planning can dilute earnings per share because more stock is created when the debt is converted into equity.

WebMD currently has about 311 million shares outstanding. The notes in the company's debt sale are convertible into common stock at a price of $9.26, which could create about 32 million new shares. In this case, analysts seem convinced that the deal will be a positive for WebMD if the proceeds go toward a smart acquisition. Plus, they say the deal ultimately shouldn't dilute the stakes of current shareholders.

One analyst, Patrick Hojlo of Banc of America Securities, said the shares might be slumping because some investors are worried about what appears to be an effort to raise money to put together a merger deal. "While we understand this uneasiness, we believe that it has created an attractive buying opportunity," the analyst wrote in a research note. "Our assessment of the

convertible debt sale is net favorable, because WebMD sold these notes to go after what we assume, based on conversations with management, would be an accretive acquisition."

Arbs in Charge

Hojlo and other analysts also said arbitragers who were buying the convertible securities were probably at the same time shorting the common stock.

"The stock is falling today because of the arbs," said James Kumpel, an analyst at Raymond James. "They basically priced a deal that will provide primary equity exposure on 32 million shares. If you want to hedge your risk, you go long the convert and short the stock."

Kumpel, like Hojlo, believes the company is raising money to fund an acquisition. The company raised that possibility (without naming names) in a press release detailing the offering, while also saying the proceeds could be used for share repurchases, general corporate purposes and working capital.

WebMD has $367 million in cash and might pull in another $200 million to $300 million from the expected sale of its Porex unit, Kumpel said.

Cash in Pocket

The question, then, is what the company should do with those greenbacks, analysts said. "The bottom line is they already have a lot of cash," Kumpel said. "Why do they need more if they're going to be profitable this year unless they have another major strategic acquisition coming down the pike. The likelihood is that this will be a very meaningful deal which requires a slug of cash."

Potential targets, according to one analyst, could include major rival


( NDC), which has a market capitalization of about $1.25 billion, or units of larger information technology companies like

Computer Sciences




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There are also 30 to 40 regional operations with $10 million to $15 million in revenue ripe that are ripe for the picking, according to Stephens analyst Nancy Weaver. "It's a very fragmented market," she said. "The opportunity is for WebMD to consolidate it."

Investors might worry that more acquisitions would be a burden so soon after the company completed a costly integration and restructuring plan. "People are still concerned that most of the revenue growth might come from acquisitions rather than internal growth," which usually gets a higher premium, Weaver said. "The company grew dramatically by acquisition in the past, then spent time integrating. People may wonder, are they really ready to grow again through acquisitions."