Agreements in Acquisitions Ashok Bhardwaj Abbott PhD Focus on Healthcare Consulting Seminar Series National Association of Certified Valuators and Analysts Thursday December 6 2012 ID: 807489
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Slide1
Healthcare Finance: ROFO and ROFR Agreements in Acquisitions
Ashok Bhardwaj Abbott, Ph.D.,
Focus on Healthcare Consulting Seminar Series
National Association of Certified Valuators and Analysts
Thursday, December 6, 2012
Slide2Ashok B. Abbott is an Associate Professor of Finance at West Virginia University in Morgantown, West Virginia. Professor Abbott received his MBA in Finance at Virginia Polytechnic Institute and State University (VPI&SU) in 1984, followed by a Ph.D. in finance also at VPI&SU, in 1987. His Ph.D. dissertation title was "
The valuation effects of tax legislation in corporate sell-offs
". He has published extensively in scholarly research journals and made presentations at national and international conferences. He serves on the editorial boards of The Business Valuation Review and The Value examiner. The Small Business administration recognized Professor Abbott as the Small Business Advocate-Journalist for the year 2002.His focus area of research and consulting in valuation is the level of price adjustments (discounts/premiums) appropriate for liquidity, marketability, and control attributes of the interests being appraised. Professor Abbott consults for valuation divisions of well-known firms, such as Standard & Poor's, Duff & Phelps, Willamette Management Associates, Houlihan Valuation Advisors, among others. He has served as an expert witness in the business valuation arena for 15 years. You can see his full CV at www.be.wvu.edu/faculty_staff/cv/ashok_abbott_cv.pdf.
Slide3Health Care Expenditure ( $ Billions)
Year
National health care expenditureHospital carePhysician and clinical services1980
255.7
100.5
47.7
2000
1,378.0
415.5
290.0
2005
2,021.0
606.5
419.6
2009
2,486.3
759.1
505.9
Slide4Annualized Growth Rates
Year
National health care expenditureHospital carePhysician and clinical services1980-2009
8%
7%
8%
2000-2009
7%
7%
6%
2005-2009
5%
6%
5%
Slide5Health Care Utilization Evolution
Health care Utilization
1980200020052009
Admissions per 1,000 population
159
117
119
116
Admissions per bed
37
40
44
44
Average length of stay
7.6
5.8
5.6
5.4
Outpatient visits per admission
5.6
15.8
16.6
18.1
Outpatient visits per 1,000 population
890
1,852
1,976
2,091
Surgical operations (millions)
18.8
26.1
27.5
27.5
Slide6Changing Utilization PatternsHospital admissions as a proportion of the population have declined.Average length of hospital stay has declined.
Outpatient visits have more than doubled.
Physician offices are gatekeepers of hospital admissions.
Slide7Market Consolidation
Largest 50 participants
Number of establishmentsRevenues ( $million)Market share concentration(%)Year2002
2007
2002
2007
2002
2007
Health care establishments
11,010
14,074
177,102
252,059
14.7
15.1
growth
4.9%
7.1%
0.5%
Ambulatory health care services
10,779
15,403
48,874
72,311
10
10.8
growth
7.1%
7.8%
1.5%
Physician offices
2,738
3,976
22,376
37,047
9
11
growth
7.5%
10.1%
4.0%
Slide8Growth through acquisitionPhysician practices are being acquired at a rapid clip by hospitals,
private equity firms,
and health insurance companies.Physician office consolidation is growing at rates approaching eight times the consolidation of healthcare facilities.
Slide9Consolidation Trends in HealthcareHealthcare industry is moving towards an integrated model as a survival strategy.
Revenue squeeze is accompanied by cost escalation.
Economies of scale and scope are being explored aggressively.
Slide10Vertical Integration
Slide11Acquisition Déjà VuIs 2010 a repeat of 1990?Not quite Contractual problems were rampant in the HMO creation boom of 1990s.
Acquisitions in 2010s are being made with substantial contractual safeguards.
First purchase rights are being used increasingly in healthcare acquisition negotiations.
Slide12Health care acquisition landscapeHealthcare acquisitions are subject to considerable regulatory hurdles.A
nti-trust challenges are being used to block potential acquisitions.
Competing acquirers are using regulatory challenges to gain competitive advantageSuch actions increase transaction costs making acquisitions less profitable.
Slide13First Purchase Rights Healthcare acquisitions are motivated by strategic considerations.Wealth gains are expected as a result of the acquisition.
Value of anticipated gains from acquisition is incorporated in the acquisition negotiations.
First purchase rights are being acquired to gain competitive advantage.
Slide14Two forms of first purchase rightsFirst Purchase rights can take the form of Right of first offer (ROFO)
Right of first refusal (ROFR)
These are rights to purchase the asset but do not obligate the holder to purchase the asset at the offering price.ROFRs restrict marketability because they discourage third parties from engaging in the time, effort, and expense of due diligence regarding investment in the asset.
Slide15Right of first offer ( ROFO)A right of first offer requires the owner of a property to let the right holder make
a good faith offer
to purchase the subject property; if the owner rejects that offer, the owner can sell the property to a third party only at a price above the one offered by the right holder.ROFO right holder has the first mover advantage.
Slide16Strategic considerations in ROFORight holder gets to set the bar.Right holder can set the minimum price payable by a potentially competitive acquirer.
If this price is set high enough it can preclude the competitor from making an offer
The owner of the asset has the ability to get a higher offer.Right holder gets one shot.
Slide17Right of first refusal (ROFR)A right of first refusal requires the owner of an asset to offer the property to
the right holder
on the same terms as those offered by a third party before the owner can sell the property to a third party.ROFR right Holder has the last mover advantage.
Slide18Strategic considerations in ROFRRight holder gets to see the bar and clear it.Right holder can meet and marginally exceed the maximum price offered by a potentially competitive acquirer.
The existence of this second chance can preclude the competitor from making an offer
The owner’s ability to get a higher offer is restricted.Right holder gets the final shot.
Slide19Comparing ROFO and ROFR
ROFO is exercised with limited information as the competing bid is unknown.
Right holder has to anticipate the highest competing bid and place a marginally higher bid on the block.Competing bidder can outbid the opening bid marginally to win the transaction.Owner of the asset can use ROFO as a bargaining chip.ROFO has value , though limited, to the right holder.
Slide20Comparing ROFO and ROFR(contd.)ROFR is exercised with full information as the competing bid is known.
Right holder has to place a marginally higher bid than the known, competing, bid on the block.
Competing bidder cannot outbid the closing ROFR bid to win the transaction.Owner of the right can use ROFR as a bargaining chip.ROFR has value to the right holder which is higher than the value derived from ROFO.
Slide21Pricing first purchase rightsFirst purchase rights are valuable.Owner of the asset gives up an opportunity at an open auction restricting marketability.
Right holder is not obligated to make the highest possible offer.
Right holder has to only beat the next best offer.
Slide22Valuing first purchase rightsROFO and ROFR are valuable.ROFO allows the buyer to make a bid for the asset and can be valued as a simple call option.
ROFR allows the buyer to buy at the highest price achieved for the asset and can be valued as a look back put.
Slide23Valuing first purchase rightsFirst purchase rights are valuable when right holder is likely to value the
asset
more highly than a third party and/or a third party is likely to value it more highly than seller.
Slide24Option Model Implementation The exchange option, first developed by Margrabe (1978), has proven to be an extremely powerful generalization of the Black-Scholes model.
ROFO and ROFR contracts can be modeled and priced using Margrabe equations.
Slide25Questions?Please do not hesitate to contact us for any clarifications.Ashok
Bhardwaj
Abbott Ph.D. MBAEmail abbott.ashok@gmail.com Phone 304 692 1385