Report on Hospital Corporation of America Case
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Strategic Finance Management Project[pic 1]Report on Hospital Corporation of America CaseSubmitted toProf. S. KuntluruPrepared ByGROUP 7Ajinkya ParabAzeera AzizKeerthi SindhuriShachi TayalShraddha JoseContentsIntroduction Hospital Corporation of America’s performance Debt Ratio Growth Rate ROE Bond Rating Recommendations Recommendations on future strategy Recommendations on Asset Efficiency Recommendations on Financial Goals: . Recommendations on Funding needs _ Interest coverage ratio and bond rating Debt Repayment- Debt Mix and Debt Maturities . Conclusions _ IntroductionHospital Corporation of America (HCA) is a proprietary hospital management company. After following a conservative growth strategy since its formation, the company has now turned towards acquisitive growth strategy by taking over hospital companies and nonprofit hospitals. The firm is also considering expanding into new health services like home health care and outpatient surgery. The company is at a crossroads with regard to its financial goals; the principal issue being that of increase in debt to total capital ratio. HCA currently faces the likelihood of changes to the Medicare/Medicaid policy which could upset the company’s steady revenue flows, increase competition reducing utilization ratio of their services and strain the company’s profitability along with a substantial increase in financial leverage risks coupled with an increase in required expenditure to reap the effect of prospective operating synergies like economies of scale and scope from the acquisitions. Hospital Corporation of America’s performanceHCA has identified the following performance levers for ascertaining its good performance : Debt Ratio, Growth Rate, ROE, and Bond Rating.Debt RatioCurrently, HCA is at an all-time high debt ratio of around 70%; well above their established target ratio of 60%. The increase in debt ratio has invited the wrath of rating agencies who have clearly stated that in order for HCA to maintain their A bond rating it must return to its former 60-40 capital structure. Now the question arises as to whether the A rating should be sought or should HCA move to a less conservative position. Some investors believe that a more aggressive use of leverage would present greater opportunities in the future. Others feel that with changes in Medicare/Medicaid reimbursement structure on the horizon, HCA should remain conservative.
Growth RateHCA set a minimum growth rate of 13% but they were aiming for 25-30% growth rate (expected industry average). This growth rate was envisioned to thwart the high competition existing in the industry and emerge as a clear No.1 player. Also, growth rate was a crucial factor in determining price of company’s equity which was closely followed by several investors. As far as strategy was concerned, growth was to be achieved majorly through acquisition. Growth was also envisioned through venturing into home health care and outpatient surgery areas. Analysts believed that acquiring for-profit hospital chains would run its course in the near future and only possibility of continuing this strategy would be through acquiring nonprofit hospital chains that had hordes of problems. HCA was suitably positioned for this task as its management had great reputation and the company as such had clean image along with leadership position. The only downside of extensive growth rate was increased probability of reduced profitability as turning around and assimilating both for-profit and non-profit hospital chains would require substantial investments and time duration. HCA’s net profit margin steadily shrinked from 6% to 4.6% in between 1972-1981. ROEHCA currently holds an ROE of 23.7%, higher than the target ROE of 17%. It is important for HCA to maintain this ratio because it is a measure of efficiency used throughout the market. ROE data is only meaningful as a comparative metric for a particular industry. Humana currently holds an ROE of 43.1% (Case Exhibit 5) therefore setting a high standard in the Hospital industry sector.Bond RatingWithout a change in the current capital structure policy, HCA will most likely lose their A bond rating by the end of the summer. By change, implication is to reduce debt-to-capital ratio. There are two ways to do this: Decrease growth (Upside is that debt to be raised for acquisition and investment will reduce while there is a risk that Numero Uno spot in the future might get compromised) 2) Decrease debt/equity. The capital had reached $2.5 billion dollar. So offloading so much capital is always going to be an upheaval task. Other solution would be to issue more shares maybe preferred; but that would dilute ownership and it itself might face risk of acquisition in future !Decreasing growth coupled with decreasing profits would prove to be disastrous; even leading to erosion of wealth through equity failing the primary objective of lowering growth. If HCA chooses to remain at the current debt ratio and take on a lower rating, suspicion might arise among investors. Both cases have their advantages and disadvantages.