What are some reasons in favor of the acquisition of Sooner Clinics by UHSC? Are there concerns about the acquisition?
Acquisition means the act of acquiring something or gained (Merriam-Webster, 2019). Some of the reasons are that according to the unit 8 powerpoint, UHSC understands primary care, has studied Sooner’s operations for several years, and should encounter no unusual operating problems or surprises. Synergy is a good reason because operating synergies are the ones that allow firms to increase their operating income (Motives for acquisitions, n.d. ).
Some of the UHSC senior managers know the two Sooner clinic founders that see things the same way which means that they are on the same page (Pink, G. H. & P. H., 2018). Sooner would also benefit from access to a larger network and greater net revenue from the UHsc expertise in boosting physician productivity (Pink, G. H. & P. H., 2018). These are some of the reasons that acquisition is in favor of the Sooner Clinics by UHSC.
As a baseline, what is the estimated value of Sooner Clinics using the
free operating cash flow method, the free cash flow to equity holders method, and the market multiple method?
Explain any input data that you calculate.
To determine the estimated value of Sooner Clinics using the free operating cash flow method, will will need to determine how much cash flow is present. According to the information provided, the Sooners Clinics will see 437 patients per week with a breakdown of 255 patients at the midtown clinic and 172 patients at the downtown clinic. This is a total of $22,204 patients per year from all of the clinics. Using the data provided in the case study and exhibits, you will see the five year projections.
Using the FOCF method you will see the calculations of the earnings before interest and taxes which equals $465,451.00, this will need to be reduced by the taxes, capital requirements and added to the depreciation. The calculations should look something like this, $465,461.00 minus 20 percent for taxes which equals $372,360.80, the depreciation rate of two percent equals $11,291 which is shown in figure 2 ,the total FOCF is $358,652.
To figure out the FOCF we will need to consider the cost of debt that was determined to be six percent and liabilities at 15 percent of the capital structure which will be used in determining the weighted cost of the overall capital.
The Estimated value of the free cash flow to equity holders method will determine the free cash flow to equity holders that are available which is $355,430.00, you will add the depreciation of $11,291.00 and subtract 85% of the capital requirements.
In figure 3 we can see that the cost of equity is 14% and will give us a terminal value for the plus five years once added to the cash flow with the non-operating assets of $492,860.00, the overall FCFE method value will be $4,341,483.00.
You should have found that the values produced by the five methods are relatively consistent, but there are differences.
a. What does each method assume about the source of value?
b. Which method(s) do you believe to be the best for Sooner Clinics? Justify your
The free operating cash flow method is the most accurate method to use since large expenditures are not included in the metric. EBIT, EBITDA, and Net Income all have income reported which is not cash, this is a significant impact on Sooners Clinics because the income shown is not true income. By looking at the cash flow of the clinic a common trend can be used to determine whether the clinic is bringing in a positive growth. If a trend shows stability this means that the organization is going uphills but if there is a lot of variations seen then this could mean that the organization is going downhill or just have a lot of investments.
Since Sooner Clinic is a smaller practice the recommendation would be the free operating cash flow method because the clinic will know if they have enough money to run the clinic after capital expenditures are paid back.
Suppose another health system is interested in acquiring Sooner
Clinics. Does the value of Sooner Clinics depend on who makes the
acquisition? Explain why or why not.
a. Are taxes relatively important in determining the value of Sooner Clinics?
b. Suppose the Year 6+ revenue growth rate could be as low as 1 percent and as high as 3 percent. Is the 6+ revenue growth rate relatively important in determining the value of Sooner Clinics?
Should all partners receive the same per share amount if the practice is sold? Explain.
Motives for Acquisitions. (N.D). Retrieved from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/acqmotives.htm
CFI. (n.d). FCFF vs. FCFE Differences between Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/fcff-vs-fcfe/