1. Key financial drivers resulting in the merger of healthcare organizations?
2. Evaluation of the financial performance of an organization post merger?
3. Factors driving the financial planning in the post merger phase and its impact on the organization?
4. Analysis of the high value of a financial planning process for healthcare organization?
5. Financial stability of the health sector in the next five years?
1) Key financial drivers resulting in the merger of healthcare organizations
Healthcare sector continues to grow at a very fast pace across the world at 5.9% CAGR and according to World Health Organization (WHO) there is still a shortage of 1 million doctors globally and a huge segment of the poor people in Africa, Middle-East and Latin America cannot access to this facility. The healthcare organizations are tying up with insurance companies as well as profitable companies to get advantage both in cost and expertise. Consolidation in this segment helps the smaller organizations to create medical records and provide specialized services. The biggest financial driver which is fuelling the merger deals includes huge cost of operations as well as weak profitability. Most healthcare organizations are looking to reduce their expenditure on equipments and machinery and spend that money on bringing in good physicians (Flower, 2012). Huge number of Private Equity funds is also investing aggressively in this sector and by 2018 healthcare expenditures are expected to exceed 20 percent of GDP ($3.3 trillion). In US alone 30 percent of the hospitals are having negative operating margins and are literally struggling to even maintain the infrastructure. The cost, quality as well as service quality can be improved with mergers that would be beneficial for both the patients as well as the organizations.
2) Evaluation of the financial performance of an organization post merger
Most companies in healthcare sector have improved their position marginally after the merger deals. St Louis based healthcare firm Centene took over a health insurer HealthNet for $6.8billion. This helped them to create a Medicaid membership of around 6 million. This program is a federally and state funded scheme in the US which helps the marginalized sections of the people along with disability to get benefitted (Prescott and Polak, 2011). This has helped Centene to reduce their cost of operations by around 13% as well as gain a more dominant market share. The net profit after tax increased from $13m to $32m and the dividend payout ratio was also higher. Centene did this merger in a stock and cash deal where they paid $28.25 and 0.622 shares and took over the debt amount of $500 million in their balance sheet. The company has benefited a lot under the affordable care act.
Determinants of the evaluation criteria for analysts to determine the value generated post merger
The evaluation criteria which analysts use for judging a merger deal includes:
Value creation for shareholders: This is one of the most important issues in the analysis of a merger. If there is no wealth generation for the shareholders then the organization would find it difficult to continue with the joint venture operation. The market capitalization of the company has to increase and the returns on the cost of capital have to be better.
Shared vision: Both the organizations should be having the same goal, vision and mission post merger which would always help to avoid conflicts of interest. The business policy of the organization as well as management policies needs to be in line with the long term perspectives of the company. The culture of engagement between the two companies would have to be at the maximum (Prescott and Polak, 2011).
Growth prospect: Analysts would always see whether there is enough potential in the market based on the area of operations (country and states), demand supply gap and political cooperation of the respective state. This becomes a complicated issue in case of cross border mergers where the geopolitical situations are different.
Technology: It is one of the prime aspects of the development of the organization and analysts certainly give importance to it. Employee costs can be reduced through software and automation and robotics are also playing a vital part in conducting operations, detecting the diseases as well as reducing the time for treatment.
3) Factors driving the financial planning in the post merger phase and its impact on the organization
The three main things which organizations keep in mind after the merger are:
Transition management: In the post merger phase transition management plays the most important part in improving the profitability margin as well as operating ratio. Employee salary, infrastructure management and other non planned expenditures would increase by a very large margin. At the same time equipment cost and maintenance and tax mergers will reduce the cost of operations and at the same time bring more profits to the company (Jones, 2012).
Synergy creation: Synergy in financial terms means that the total value of two companies should be more than the value of one entity. In a research conducted by Bain where it had collected data of 22000 companies across a range of industries they found that in around 3 years time synergy gains are only adding 16.8% improvement of the organization. The Earnings before Interest Depreciation and Tax (EBITDA) was $2.25 billion. Deal financing, benchmarking as well as improvement in the performance of organizations are the most vital areas where an organization
Design and Implementation: Development and implementation of the redistribution and allocation of resources of the organization is vital. The specific needs of the different stakeholders will be analyzed which has to be met.
4) Analysis of the high value of a financial planning process for healthcare organization
Strategic financial planning is an area which can give potential competitive advantage to an organization. This includes financial models for the healthcare sector as well as integrated information technology solutions which have the capacity to reduce the maintenance cost and improve the efficiency of the company. Tracking and monitoring variances and improving the accountability of the employees is also a part of the daily procedure of the company. Budgeting is a cumbersome process in the healthcare sector because the demand and supply continues to fluctuate every single month (Jones, 2012). Employee expenses and benefits form a huge chunk of the cost of the organization. In merger acquisition deals investment banks and private equity firms are asked for advice so that financial miscalculation can be avoided. It gives leverage in many ways to the organization and helps in improving the quality of the organization as well as reduces cost.
5) Financial stability of the health sector in the next five years
The healthcare market in the global context would continue to remain high with the variation of diseases increasing and extremely high level of research is going on to deal with deadly viruses like cancer, Alzheimer’s. Along with this testing facilities which involve the clinical labs are also on the rise and hence the growth potential is huge. Berkshire Hathaway in a research has predicted that horizontal growth will be increasing but excessive cost of operations has created problems for companies in making profits. Experts believed that after a huge number of job cuts during the recessionary phase a stark improvement has been observed in the recent years where 7.9 million jobs have been added. The stability factor will not be positive for all health institutes and it would be depending upon the problems the respective countries will face because of the fact that the remuneration and reimbursement would be depending upon this.
Problems include issues of weak organic growth in the healthcare products as well as continue to make efforts for controlling spending. Flexibility is very important in this market because for growing in top line areas strong presence in the developing markets are required. The non-operating margin is expected to increase from 0.2 percent to 2.2 percent in the next fiscal.
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