Cicpa Past Paper

Case #3 HCA

Mergers & Acquisition

9/24/16

Question 1

1. Current performance of HCA: With HCA struggling over the past couple of years to meet analysts’ expectations along with the rapid increase in bad debt expenses/doubtful accounts, senior management feels that an LBO will allow both management and the PE firms to take the company out of the public eye and turn things around. The LBO will allow for greater flexibility and leeway to restructure HCA’s operations and maximize its value in an effective and efficient manner.
2. Challenges HCA will face going forward without the LBO: Share price / Value of HCA is expected to further slide with the release of Q2 results. Doubtful accounts/uninsured patients both expected to rise, putting further strain on HCA’s operations and value.
3. How does LBO help to resolve these challenges: The benefit of an LBO is that it allows senior management and PE firms to acquire the company and take it private and perform corporate restructuring. The company can replace management/staff, sell Assets, perform divestitures cut Cap Ex, etc… in order to revitalize and reorganize the company.

Question 2

Yes, shareholders do have valid reasons to be concerned about the LBO process if their interests are not fully aligned with the company’s senior management/buyout group. For instance, if senior management is looking to do an LBO, a conflict of interest may arise if management intentionally mismanages the company in order to achieve a lower price per share for the acquisition. Additionally, if management is solely doing an LBO in order to gain greater profits for themselves, then this reveals a conflict of interest with regards to management’s fiduciary duty to its shareholders. Another conflict of interest may occur if management cuts employee staff, who may also be shareholders, when going through the LBO process.