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Executive Summary

Baxter's ongoing challenge to the HCA/AHSC merger through its $3.7 bil. offer for AHSC now rests with the AHSC shareholders, who will decide on July 12 whether to go ahead with the merger with HCA. After Baxter's initial $50 per share offer was rejected by the AHSC board of directors on June 25, Baxter came back on June 27 with a revised offer designed to better satisfy both management and shareholder concerns with the initial offer. The renewed offer has been extended to July 15 -- three days beyond AHSC's shareholder meeting to decide the fate of the merger plan with Hospital Corporation of America. In a letter to AHSC Chairman Karl Bays, Baxter Chairman Vernon Loucks stated: "We will not consider this offer as rejected by your board until a decision is made after your shareholders have voted on the HCA transaction." AHSC and HCA shareholders were originally scheduled to meet July 3 to vote on the merger. AHSC has postponed its shareholders meeting until July 12 to accommodate the mailing of new proxy materials. HCA shareholders will meet on July 10. The courtship for AHSC until then may take the form of a public relations contest to see which firm can best get its message across to AHSC shareholders. In arguing for a Baxter/AHSC combination, Baxter is playing on a key investor concern -- AHSC's loss of hospital business with competitors of HCA. "Baxter's acquisition of American would create a strong and independent supply source to all hospitals and health care providers, a company able to make an important contribution toward containing health care costs all along the delivery chain, internationally as well as in the U.S.," Loucks said in a June 25 response to the AHSC board decision. Baxter has pointed out that if AHSC does go ahead with a stock exchange with HCA, the company faces the possibility of being delisted from the New York Stock Exchange. Under current regulations, any transfer of more than 18.5% of a company's stock without prior shareholder approval is forbidden. However, that policy is "under study" by the NYSE, AHSC said. Pending the outcome of that study, the NYSE will not delist any stock that appeals delisting procedures, AHSC noted. Also, AHSC and HCA would use their efforts to have Kuron, the name selected for an AHSC/HCA merger, listed on the NYSE, the firm added. Under Illinois law, the HCA/AHSC merger must be approved by two-thirds of AHSC's shareholders. About 63% of the company's stock is held by institutional investors. Even if the shareholders do not approve the merger, under the terms of the agreement the two firms are legally tied to one another until December, AHSC claims. If the merger falls through, AHSC will not seek another merger partner, according to the firm. "AHSC is not for sale," Bays declared. In the June 29 mailing of its new proxy materials, AHSC also enclosed the opinion of its financial advisor, Merrill Lynch, in support of the merger with HCA. In addition, in a June 27 response to Baxter's revised offer, AHSC Chairman Karl Bays' comments took a harsher tone in characterizing Baxter's eleventh hour bid. Bays said that the Baxter proposal "is a last ditch effort by Baxter in its attempt to spoil a proposed transaction with HCA." AHSC also said that "the poor performance of Baxter has made it a target company willing to abandon good business sense to try to keep American from becoming, with its partner, HCA, the premier health care company. AHSC said its management and board "take a dim view of Baxter's business prospects." Although Baxter's communications continue to take the form of private proposals to the board, thereby avoiding the "public proposal" trigger for the AHSC/HCA stock swap stipulated in the merger proxy, Baxter has made the letters available to the press in order to keep investors updated on the terms of its offer. However, the private nature of the offer also frees AHSC from any legal necessity to take the offer to a shareholder vote. Baxter originally offered $50 a share for AHSC with half in cash and half in stock ("The Pink Sheet" June 24, p. 12). The offer would have been lowered by about $5 a share depending on whether AHSC chose to invoke a protective stock exchange provision included in the company's proposed merger agreement with HCA. In Baxter's new offer, there would be no downward adjustment of the compensation offered to AHSC stockholders if the share exchange with HCA goes through. Instead, Baxter would exclude the 39 mil. shares of AHSC common stock, which would then be held by HCA, from the $50 cash or Baxter equity securities offer, Loucks explains in his June 27 letter to Bays. "Instead, we would return to HCA the 29.25 mil. shares of its common stock which it issued to AHSC in exchange for those 39 mil. shares of AHSC common stock." AHSC And Baxter Would Have To Divest $500 Mil. In Overlapping Business To Satisfy Antitrust Requirements The other aspect of Baxter's improved offer involves a guarantee of the value of Baxter securities. Baxter now suggests that the securities issued to AHSC stockholders could be either Baxter common, preferred, or a combination of both. Advisory opinions will be based on the value of closing market prices for Baxter shares during the 20 trading days preceding the merger closing, Loucks said. In his June 27 letter to Bays outlining Baxter's revised offer, Loucks also responded to the concerns of AHSC's board of directors publicized in the rejection of Baxter's initial offer. "Our objective is to offer your board of directors a clear choice between $50 and the $35 value of the HCA transaction," Loucks said. Responding to AHSC's concern over the "massive" debt Baxter would have to incur, Loucks said that the company's debt-to-capital ratio after completing the acquisition of AHSC would be less than 45%, "lower than HCA's debt-to-capital ratio before its proposed merger with" AHSC, of about 50%. The AHSC board also cited the possible antitrust aspects of an AHSC/Baxter combination and a potential slow growth rate for the combined entity as reasons for opposing the offer. AHSC and Baxter would have to divest about $500 mil. in overlapping businesses to satisfy Justice Dept. requirements for a merger, AHSC estimated. In addition, "if Justice Dept. and other regulatory approvals could be obtained," AHSC said, "the time required for divestitures could significantly delay the acquisition and the cost would severely penalize the company." AHSC's legal counsel has advised that the divestitures would have to take place before an acquisition could be effected, and could take up to six months, AHSC said. Businesses with "substantial" overlap -- - that is, where one or the other is at least fourth in a market -- - include intravenous solutions and nutritionals, blood oxygenators, blood collection systems, a variety of catheters, kits and trays for medical procedures, surgical gloves, respiratory products, peritoneal dialysis products and blood expanding drugs, AHSC said. AHSC based its estimate of $500 mil. in directly competitive businesses on the smaller of each business in a particular area, the spokeswoman said. Baxter has indicated repeatedly that it is willing to satisfy any divestiture requirements stipulated by the justice Department. In a June 27 letter revising the firm's offer for AHSC, Baxter President Vernon Loucks maintains that, "In fact, there are only a few areas of overlap involving approximately 15% of AHSC's 1984 sales." Baxter already has been approached by "several potential purchasers," Loucks added, "and I believe we will have little difficulty arranging any required sales on acceptable terms without delaying our transaction with AHSC."

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