WebMD Investors' Actions Don't Support a Deal Diagnosis

(Bloomberg Gadfly) -- Let's face it: WebMD is where your inner hypochondriac goes to neurotically self-diagnose an illness you probably don't have. (Am I just tired? Or is it lupus?) However, jumping to conclusions isn't something WebMD Health Corp.'s investors are willing to do.

The $2 billion health website said last month that it's exploring strategic alternatives, which means it's for sale. Then on Monday, Cliff Robbins's activist fund Blue Harbour Group disclosed an increased stake of nearly 9 percent, up from 4.8 percent as of December, saying that it continues to hold talks with WebMD's management and other shareholders about potentials deals, changes and whatnot. 

Despite all this, options trading in WebMD is quite bearish, which isn't what you'd normally expect to see in a potential takeover candidate. 

Puts protecting against a drop in WebMD's stock price cost much more than calls wagering on a rally. Options buying can provide clues around M&A speculation, and often the opposite is true -- that call contracts become more popular -- when traders are wagering on an acquisition. WebMD shares, too, are being suppressed.

The reason is twofold. First, it seems that any optimism for a takeover is being offset by the very disappointing revenue and profit forecasts management gave in February. Second, there is the feeling that we've been here before. 

Back in 2011, WebMD's stock plunged and attracted sizable investments from activist hedge-fund manager Carl Icahn and billionaire George Soros, who both called the company undervalued. While they weren't pushing for a sale, WebMD had received an expression of interest from a private equity firm and contacted other potential buyers. 

The result? It ended up not receiving any viable bid proposals and said that even if it had, the offers would have been for less than the company's market value at the time. And in 2013, WebMD repurchased Icahn's shares. 

Analysts have pointed out that, hypothetically, WebMD could appeal to a wider range of buyers now: not just buyout firms but also health-care companies, owners of digital content such as Time Inc., or even drugstore chain Walgreens Boots Alliance Inc. Sure, its stock price may be relatively cheap versus the cash it throws off, a metric that can bait financial suitors. Plus, WebMD's smaller peer Everyday Health Inc. scored a 30 percent takeover premium last year. 

If it weren't for the possibility of a deal, the stock would probably be lower than it is now. Still, there's no guarantee WebMD will get bought. Insider selling late last year doesn't exactly spell optimism about the business either.

It's no wonder WebMD investors aren't showing the tell-tale symptoms of acquisition fever.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.