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WebMD charts independent course

by Olaf de Senerpont Domis  |  Published January 11, 2012 at 9:47 AM
Shares of WebMD Health Corp. plunged nearly 32% in early trading Tuesday after the online health information provider announced the end of takeover talks, the resignation of its CEO and lowered financial guidance stemming from weak 2012 growth prospects.

The New York-based company said it is no longer considering a potential sale, ending a process that was launched late last year by the independent members of its board. A special committee formed by these directors held discussions with several potential acquirers, who conducted due diligence, the company said.

Speculation abounded in November and December that several private equity firms, including Kohlberg Kravis Roberts & Co. LP and Providence Equity Partners LLC, had taken an interest in the company, which provides online health information and services to consumers and healthcare professionals. Some observers saw the potential for a $40 per share bid.

Credit Suisse Group acted as WebMD's financial adviser in the process and Shearman & Sterling LLP provided legal counsel.

The takeover attention followed interest from activist investors last fall. In October, Carl Icahn revealed that he had taken a nearly 8% stake in the company, arguing that its shares were undervalued. A few days later, Soros Fund Management LLC followed suit by buying a 5.6% WebMD stake. In November Icahn increased his stake to nearly 10%. WebMD responded by adopting a shareholder rights plan.

In late November Icahn told WebMD he preferred the company undertake a share buyback program rather than a sale to a private equity firm.

Neither Icahn nor Soros had responded to the company's announcements by Tuesday afternoon.

Also Tuesday, WebMD announced the resignation of its president and CEO Wayne Gattinella, who has led the company since it went public in 2005 after being spun out of its former parent, HLTH Corp. WebMD said it will be run in the interim by Anthony Vuolo, currently the company's chief financial officer and chief operating officer, as the company searches for a permanent chief. It did not disclose why Gattinella resigned.

The third piece of troubling news for WebMD Tuesday was its new financial outlook. Revenue for 2012 could be as much as 8% lower than last year, it said. WebMD cited a more competitive landscape in its consumer products market due to a variety of increasingly popular advertising networks and social sites. It also blamed the challenges facing pharmaceutical companies, which are paring costs as they face new competition from a bevy of makers of generic drugs.

"While we believe WebMD remains the dominant health information brand online, pharma advertisers always have the option to shift advertising to other online properties, such as Google Search, to offline advertising, or to simply reduce advertising expenditures," wrote Cowen and Co. LLC analyst Kevin Kopelman in a research note Tuesday.

WebMD chairman Martin Wygod put a positive spin on the trend, arguing that eventually it could push drugmakers to move to more efficient methods of advertising.

"I believe that the pressures facing the pharmaceutical industry will ultimately prove to be the strong catalyst for a meaningful shift by them to digital marketing solutions," he said in a statement. "WebMD offers a cost-effective, efficient and highly measurable alternative."

WebMD said it expects an increase in new pharmaceutical product introductions in the first half of this year, but the launches of these products will not happen until the second half.

WebMD emerged from the 1999 merger of online healthcare companies Healtheon Corp. and WebMD Inc. The combined company used a buoyant stock price to spend billions on acquiring other healthcare-related businesses, and WebMD grew into the top name in online health information.

It spent $2.75 billion in cash and stock to buy electronic transactions processing company Envoy Corp. in 2001. The company spent a further $5.3 billion in stock that same year to acquire Medical Manager Corp., a maker of software that manages doctors' offices, and its CareInsite subsidiary, which operated an online network linking doctors to patients.

The company, which eventually became known as HLTH, took its online health information services arm WebMD public seven years ago, but in October 2009, HLTH merged into WebMD to simplify the companies' corporate, capital and share structures.

WebMD is expected to report fourth-quarter results and provide further financial guidance on Feb. 23.
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Olaf de Senerpont Domis

Bureau chief, West Coast; Editor, venture capital

Olaf de Senerpont Domis, West Coast bureau chief, focuses on venture capital, technology M&A and IPOs, penning the Silicon Valley Special column. Contact



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