DHS, Medical Alliance call off merger

The drawn-out attempt at a union between imaging services provider Diagnostic Health Services and Medical Alliance is now over. The firms had announced that they would merge in February (SCAN 3/3/99), and then decided to retool the merger in May to make it more acceptable to shareholders, whose response to the terms of the original agreement (SCAN 5/26/99) had been tepid. In the end, however, the deal collapsed because the companies’ boards of directors weren’t confident they could deliver the anticipated value of the deal to their shareholders, according to Brad Hummel, president and CEO of DHS.

DHS had publicly announced in 1998 that it was seeking a merger partner, and shortly thereafter found Medical Alliance, a shared-services provider of office-based surgical procedures.

Now that the deal has ended, DHS will first focus on ways to improve its balance sheet, specifically the restructuring of the firm’s senior and subordinated debt positions, Hummel said.

“The principal problem with DHS is that it’s overleveraged,” Hummel said. “There’s nothing wrong with our business model. But the debt has created a cash constraint.”

Once the restructuring has been accomplished, DHS will investigate all options to raise more capital, he said. As a result of the merger termination, DHS will record a one-time charge of approximately $725,000 in its second quarter (end-June), while Medical Alliance will have a charge of approximately $850,000. In other developments, DHS was informed that the NASDAQ Stock Market had delisted DHS stock from trading on the NASDAQ National Market, effective at the close of trading on Aug. 11. The firm’s shares will now trade on the Over the Counter bulletin board.