HCA Opting for a Leveraged Buyout: A Case Study
Why is the senior management of HCA pursuing an LBO of the firm?
Prior to the LBO offer, HCA was suffering from poor market performance. The firm’s bad-debt expense was growing at a rate faster than anticipated. In 2005, uninsured emergency visits and uninsured admissions increased by 9.9% and 8.9% respectively, and it is estimated nationally that 85% of uninsured do not pay their medical bills. Moreover, the uninsured population was growing at a faster pace in the states HCA operated in than nationally. The bad-debt expense trend was a major factor that forced HCA to persistently underperform market expectations; HCA reduced the EBITDA projections down by 7.9% in April of 2006 relative to January, and then again by 3.2% in May of 2006. The firm has already missed market expectation in 8 of the past 13 quarters, and was en-route to disappoint again. The pressure to meet analyst expectations was counter-productive to the company revitalization effort. Given this, senior management decided it would be a good idea to take the company away from the public spot light via an LBO so that the company can focus on solving its operational issues without the scrutiny from the market.
How is HCA performing? What are the challenges that the firm faces going forward without an LBO? How does the LBO help resolve any of those challenges?
Given the continued poor performance of HCA, as evident through missing consensus earnings forecasts in 8 of the previous 13 quarters and the high possibility of missing consensus this quarter as well, the market is expected to punish HCA yet again. Without an LBO, this persistent underperformance will embolden shareholders to oust current management at HCA. The impact would be to generate further uncertainty in the operation and structure of the firm and further take management time away from solving the true underlying problems. Management will be prevented from thinking long term and must focus more of their attention to the shorter term
Prior to the LBO offer, HCA was suffering from poor market performance. The firm’s bad-debt expense was growing at a rate faster than anticipated. In 2005, uninsured emergency visits and uninsured admissions increased by 9.9% and 8.9% respectively, and it is estimated nationally that 85% of uninsured do not pay their medical bills. Moreover, the uninsured population was growing at a faster pace in the states HCA operated in than nationally. The bad-debt expense trend was a major factor that forced HCA to persistently underperform market expectations; HCA reduced the EBITDA projections down by 7.9% in April of 2006 relative to January, and then again by 3.2% in May of 2006. The firm has already missed market expectation in 8 of the past 13 quarters, and was en-route to disappoint again. The pressure to meet analyst expectations was counter-productive to the company revitalization effort. Given this, senior management decided it would be a good idea to take the company away from the public spot light via an LBO so that the company can focus on solving its operational issues without the scrutiny from the market.
How is HCA performing? What are the challenges that the firm faces going forward without an LBO? How does the LBO help resolve any of those challenges?
Given the continued poor performance of HCA, as evident through missing consensus earnings forecasts in 8 of the previous 13 quarters and the high possibility of missing consensus this quarter as well, the market is expected to punish HCA yet again. Without an LBO, this persistent underperformance will embolden shareholders to oust current management at HCA. The impact would be to generate further uncertainty in the operation and structure of the firm and further take management time away from solving the true underlying problems. Management will be prevented from thinking long term and must focus more of their attention to the shorter term