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This paper will address the different nuances of Health care company merger and acquisitions , specifically it will address the key financial drivers which prompt a merger, post merger analysis , financial planning in the post merger arena and the relevance of financial analysis in a healthcare organization. Finally the paper will address the current state of the healthcare system and what we can expect to see in the future.
Financial drivers that prompt mergers and acquisitions in Healthcare organizations.
Target company value: If the acquiring company feels that the target company to merge with is undervalued it would be a win fall for the former. Also from the perspective if the target company has facilities or methodologies which are of value to the acquiring company it would make financial sense to merge with them.
The capital crunch: Healthcare firms that are constrained by capital are key candidates for mergers and acquisitions. In the medical game if a company has financial constraints in terms of investments or not being able to implement new technologies or update their tools of care they would be considered under high financial duress. For companies who are looking to acquire such firms are good candidates as structures to invest and make the best of their current framework. In the case of capital ailing firms this is a good opportunity to grow.
Financial Synergies: Companies can decide that if combined as a result of synergy can increase revenues, cut expenses or lower the cost of capital. Understanding this common ground is the foundation of comparing similar numbers. For example if a healthcare from 1 company has a set of Gynaecologists which can cover the patient load for the new merged companies, any repetition of can be removed to cut costs. (Mahesh.R; Daadilkar.P, 2012)
Scalability: Healthcare firms are always looking for investors/partners to help them grow in the scale and scope that is healthy and required for companies who want to survive in a competitive environment. This can also lead to improvement in their management techniques while merging both their management and staff.
Innovation and exploration: Apart from benefiting the bottom line there are a number of healthcare companies which are involved in research and development of new treatment and after care techniques if they feel the earning potential is greater than that of the investment. This can present the firm as a good candidate for a bigger conglomerate to absorb. From a financial standpoint some firms might require funding to support their research and development activities. A good example of this could be healthcare companies who are in need of funding for cancer research might be interested in a company’s who are willing to invest in the future findings.
Post merger financial analysis:
Assuming that two health care companies merge and an analyst is given the task of assessing the success or failure of the merger her/she would have to survey profitability, liquidity , leverage ratios , and capital market ratios etc. Apart from the traditional round up of ratios not all are applicable when studying the post merger performance of a company. The analyst should focus on the following metrics:
Dividend Per Share is calculated as follows (dividends – one time dividends)/Shares outstanding. Reveals the level of profit distribution to the shareholder in this case shows whether the share holder has benefited or lost after the merger has taken place.
Earnings per share which is calculates (Net Income-Dividends on Proffered shares)/Average Shares outstanding shows how the hospital’s profitability has improved as a result of the merger.
Price to Cash flow ratio is calculated as follows Share Price/Cash flow per share. This metric explains the ratio of a stock’s price to its cash flow per share which is an important valuator of stock price. The reason for using the price to cash flow ratio vs. Price earnings ratio is that the latter only takes profitability into account and not liquidity. An increase in this number is positive for the merged organization as it points to a higher level of liquidity and a better scenario of the cash flow. The higher the liquidity the more flexible a firm can be on investment on improvements in the business.
Net NPA to Advances Ratio which is calculated as follows Net Non performing assets /Advances. For example it would be positive if this figure was to decrease post Merger which speaks to the merged organization doing a better job of using their assets. Hospitals are well known for having assets which are not used to their fullest, equipment( assets) are purchased and never used. This ratio will help focus on making sure that the full value of equipment purchased is relinquished.(Trivedi 2013)
Financial Planning in the Post Merger Phase:
Long term strategies should be implemented while taking the above ratio analysis into account, management apart from the cultural social issues after the merger has to focus on the following metrics: (Cording; Harrison; Hoskisson; Jonsen 2014).
Net income is the measurement used at any stage to decide if dividends are paid or to quantify earnings. A combination of increasing revenues and cost control are key to the success of mergers. In an effort to better net income in a healthcare environment efforts should be made to better the level of third party repayments of insurance companies which will help improve cash flow.
Asset Management: As stated earlier it is important for the merged company to make full use of their assets, to bring out higher revenues as well as make full use of its assets and bring down the level of nonperforming assets.
Cost Cutting: In healthcare industries apart from equipment, human resources (specialized skilled medical labour) is one of its highest costs. Making sure that there is no repetition of labor and making financial decisions on how much of cost to salaries has to be done. Even if jobs are cut for a financial requirement it has to be done to cause minimum effect to patient care.
Dividend Payouts: The end goal is to make sure that earnings are reflected upon positively for all the stakeholders of the company.
Value of the financial planning process to a healthcare organization
The financial planning process is invaluable to an healthcare organization on many levels. On an operational level, a healthcare organization is dependent on the financial goals set out for billable hours to maintain its revenue stream. Without any way of knowing how many patient billable hours are required to break even the organization would not be able to function. Monitoring of costs to make sure that money is spent only for the best or more cost effective reason. Since Hospitals work on shift basis, as an example without financial planning an administrator would not be able to justify the number of staff members to post on a shift. Cost control is highly relevant to the healthcare industry with the changing laws on insurance, price of medication etc. Managing all purchases and payments to keep the day to day operations running. From a long term perspectives budgeting for human resources, purchases, cost of borrowing, investment of revenues, and paying back stockholders not only provide support for all the requirements listed above. Financial planning in a healthcare environment also allows management to gauge the daily or long term performance of the firm.
Financial Stability of the US Healthcare industry over the next five years:
The financial stability of hospital and medical providers seems bleak over the next five years. Healthcare reform or Obama care which is meant to help a greater majority of Americans , financially could serve as a double edged sword which is pushing up healthcare rates for other Americans who already had insurance.
Currently 17% of the US GDP is being spent on healthcare and is expected to drastically increase. Recent studies are showing that healthcare spending is slowing which has a direct financial effect on healthcare companies across the US. When patients decide that they will be selective over the kind of treatment, the overall number of healthcare institutions will decrease. This financial decrease will lead to tightening of belts across the board. Hospitals are already preparing themselves by cutting costs and making the best of their current investments. This will be the separating factor between a Hospital staying afloat or shutting down in the future.(Web 2014)
References
Mahesh.R, Daadilkar.P. (2012) Post Merger and Acquisition financial performance analysis A case study of select Indian airline companies. Retrieved from the international journal of engineering and management studies
Trivedi.J,(2013). A Study on Pre & Post Performance Evaluation of Merger and Acquisition
of Selected Indian Banks. Retrieved from the journal of institute of public enterprise
Cording.M, Harrison.J, Hoskisson.R, Jonsen.K(2014).WALKING THE TALK: A MULTISTAKEHOLDER EXPLORATION OF ORGANIZATIONAL AUTHENTICITY, EMPLOYEE PRODUCTIVITY, AND POST-MERGER PERFORMANCE. Retrieved from Academy of Management Perspectives
(2014) The Future of U.S. Health Care Spending. Retrieved from http://www.brookings.edu/events/2014/04/11-health-spending-future-public-health