For a successful case write up, you will need the following:
you will take your income statements and start to construct a cash flow that will also extend into Week 3. For the most part, cash flows are pretty straight forward. If you’re going to experience trouble, it almost always happens with working capital. Remember that once you’ve calculated the Total Working Capital for Year 0, all future Working Capital needs will be incremental. Almost all of the variables will be provided to you here.
Using the income statement from the previous exercise, forecast a ten year cash flow using the following assumptions:
Capital Expenditures of $50,000 per year.
Leasehold Improvements of $10,000 per year.
DSO of 75 Days.
Inventory Turnover of 12 times.
Accounts Payable of 30 days.
Depreciation is constant.
The combined Federal and State Tax Rate is 40%.
There are no additional financing expenses associated with the transaction.
After you have completed your cash flow forecast, calculate a Net Present Value assuming a discount rate of 15%.
These three are disscussion for NMC
1. In 1996, National Medical Care, a WR Grace subsidiary, found itself as a target for MA. The company’s founder, Dr. Constantine Hampers, had started the bidding war by offering to by the company for $4 billion dollars after losing out on a bid to become the WR Grace CEO – it is not stated how the founder of the company came to lose possession of the company, or what the terms of the purchase would have been. Dr. Hampers’ offer was rejected, and instead the attention of the WR Grace board shifted to offers by Baxter International Inc and Fresenius AG.
The main dilemna for the WR Grace board is to discern which of the two offers is a better fit. Baxter, already controlling 42% of the market, offered $3.8 billion dollars for the entire company. $1.8 billion dollars of which would be Baxter stock and another $1.275 billion dollars in cash. This would be a good deal for WR Grace if they believe that Baxter Inc stock was either currently undervalued, or had to substantial room to grow, or both. The merger would make Baxter the largest dialysis product manufacturer, which may lend to the opinion that Baxter stock was a “safe” bet to appreciate in value.
On the other hand, the offer from Fresenius AG was $2.3 billion dollars for 55.2% of the company – a valuation of approximately $4.15 billion dollars. The offer would have been completely financed with an issue of debt, and also would have made Fresenius the largest dialysis provider in the world. This deal would have provided the WR Grace board the prospect of a higher monetary valuation, as well as the potential to also maintain a large amount of stock in the company – which is in their interest if they think that the company could continue to grow profitably.
Obviously there are other important factors that go into deciding whether or not to accept a MA – generally factors less tangible than the financials of either company – but either offer seems to provide the WR Grace board potential monetary growth, the question is simply which one they found to be a better fit.
2.National Medical Care (NMC) seems to be a well established division of W.R. Grace. The board of directors is faced with two very different offers. Both company’s would be a backward vertical integration as they both produce dialysis products. Selling or merging with either company would produce the largest integrated dialysis company in the world (Sullivan).
Fresenius AG would like to merge with NMC, while acquiring just over half of NMC’s stock, leaving the rest for W.R. Grace shareholders. I can see some benefits of accepting this offer as any future growth of NMC would be beneficial to the existing W.R Grace shareholders – with this theory, also comes the risk of it not doing so well. Fresenius has a high estimate of sales for 1996 with the new company, which could be promising. Baxter International Inc., on the other hand’s offer is to acquire 100% of NMC’s shares and grant W.R. Grace with $1.8 billion in Baxter stock.
These two different structures and company’s financials need to be analyzed to try and gage what transaction would be most beneficial to the shareholders. Baxter is the largest dialysis products manufacturer in the world, and if it acquires NMC, then it would be a game changer. The profits that Baxter International could yield would probably exceed Fresenius’, given the current market share. I am not analyzing balance sheets or cash flows, but with this being said, maybe it might be worth it to sell to Baxter International and obtain the $1.8 billion in their stocks – just a thought. The merge potential for these two companies is HUGE, therefore giving W.R. Grace negotiation leverage.
3. Comparing the two offers, Baxter‘s offering differs due to the offer of $1.8 billion in Baxter stock, which would only be beneficial if W.R. Grace identifies Baxter stock as undervalued. According to the Health Care Financing Administration, they are expecting a compounded annual growth rate (CAGR) of 9% in the dialysis service industry. NMC has similarly matched that CAGR with their revenue increasing from $1.512 billion to $1.875 billion from 1994 to 1995 and increasing $1.875 billion to $2.076 billion from 1995 to 1996. Assuming that NMC’s growth continues, a merger would be lucrative as it would allow for a large consumption of the market share in dialysis services that is expected to keep growing and the vertical merger benefits cost-savings from an operational standpoint. I would recommended the board of W.R. Grace to be purchased by Baxter where the Baxter stock future value is compelling due to promising future cash flows of Baxter acquiring NMC. Baxter holds 42% of Dialysis products market share worldwide, whereas Fresenius only holds 13%. The acquisition would allow for greater market share compared to Fresenius (Sullivan, 2004).
However, if the W.R. Grace board wants to keep 44.8% of the company, I would recommend the merger with Fresenius as they would still keep many of their shares and most likely keep their seats on the board of NMC. Both offers after evaluating the market and the financials of both company offers can lead to successful profits. However, if W.R. Grace is willing to give up their equity in NMC, the acquisition from Baxter would allow for greater market share in the dialysis services industry and cut back on personal cost that would lead to greater profits (Sullivan, 2004).
These three are for everst
1. Ironically, I thought that NMC would be better off if Baxter acquired them. However, this case study mentions that the merger ended up happening between NMC and Fresenius, which led to Fresenius holding the greatest market share in the dialysis service worldwide. In this case, Fresenius has shown interest in merging with Everest Healthcare Services Corporation, which is one of the largest ESRD providers in the US. In addition to ESRD, Everest provides blood treatment services and management assistance where they have clinics in 12 states. Their main focus is in ESRD and with their other services in multiple states, Fresenius sees them as a good target to utilize their relationships of their 6,400 patient base and services they provide.
Everest is a leader in ESRD, but their scalability has become a challenge. They have seen some trouble in managing their overhead with increased patient costs and admin cost that led to a loss in 1999. Additionally, they were profitable years before that and have seen a troubling jump in double the interest expenses in the year 1999 from 1998. With many consolidations occurring in the industry, and where Everest has been struggling has made Everest an attractive target. Fresenius has the scalability that Everest lacks, and can utilize their centralized management to implement the acquisition of Everest to their advantage. Also, it would benefit Fresenius heavily to increase their patient base to decrease costs.
2. Everest Healthcare Services Corp (EHS) , despite being a leading dialysis provider in the US, lacks the economies of scale to overcome the challenging reimbursement environment. However, EHS’s 6,400 patient base makes it an attractive acquisition target for larger service providers seeking additional negotiating leverage with commercial payers. Recent consolidations within the industry have limited the number of acquisition targets, which positions EHS favorably in the market.
After acquiring National Medical Care (NMC), Fresenius emerged as the largest service and product provider for dialysis in the US. Given its size, Fresenius possesses the economies of scale EHS lacks, such as centralized management. billing efficiencies, and purchasing power. However, given the current reimbursement climate, Fresenius needs to add to its patient base to reduce it’s marginal costs and achieve favorable commercial payer rates, which may prove costly.
Acquisition prices in consolidations have been measured on a per patient basis, ranging from as low as $10,000 per patient to $40,000 per patient over the previous decade. More recently, Renal Treatment Centers (RTC) acquired 1,373 patients through seven acquisitions at a total cost of $59.6 million, and a per patient rate of $43,400. This would imply that the market value of EHS’s 6,400 patient base is $277.7 million. With transaction prices at record levels, reimbursement rates lagging costs, a deal between Fresenius and EHS appears fitting.
3. Fresenius gross margin in its client care business has averaged above 30% and as high as 34% the past 3 years. Everest’s is just under 30%. My suspicion was initially that Fresenius’ higher margin related to lower costs based on a verticle structure which produces its own dialysis equipment. However is not the case. On a per patient basis – Fresenius cost of care per patient was $21,702 in FY1999, compared to $20,567.81. The margin is the result of its ability to generate over 10% more revenue per patient than Everest. Fresenius EBITDA margin of 15.5% + is similarly elevated above Everest which has averaged 13%. These per patient figures also help us to understand equity valuations per patient that are prevalent in the industry. Margin pressures are expected to continue in the near term, too. The case points out a general trend of Medicare reducing reimbursement rates, but I have been unable to determine how that is projected to influence margin.
Everest margins have been pressured by bad debts, and there has been substantial increase in bad debt allowances, to 4% in 1999. This line item is not particualrly emphasized in the case but perhaps it should be. Bad debts may be a leading indicator that the company’s “payor” mix (43% non medicare/medicaid in FY1999) is a liability. Over the past 3 years the non-medicare/medicaid payor mix has increased by nearly 10% – suggesting expansion of business with private insurers (Definitive Healthcare Blog). In a landscape with shifting regulation and government repayment schemes, a diverse payor may not be a benefit, perhaps if there is a risk that services are provided erroneously or billing disputes occur.