Analysis Of Healthscope Limited’s Acquisition Of New Zealand Diagnostics

Rationale behind the acquisition

Healthscope Limited is a major healthcare provider within Australia. The firm operates and owns portfolio of across 45 surgical/medical, psychiatric and rehabilitation hospitals. Besides, Healthscope Limited is one of the leading community pathology service providers in Singapore and Malaysia (Reuters 2017). The company owns the Northland Pathology Laboratory in New Zealand that offers community pathology services to Northland region. The firm is also engaged in provision of the pathology services in New Zealand, Malaysia, Australia and Singapore (Scoop Health 2008). To accomplish all these goals and objectives, the company has made numerous acquisitions with the latest acquisition being that one of the New Zealand Diagnostic in 2007. Healthscope Limited acquired 100% shares of the New Zealand Diagnostics at unnamed amount of money (Healthscope Press Release, 2017). NZDG was one of the second biggest pathology service providers within New Zealand operating around 11 pathology laboratories as well as around two radiology dealings. In addition, NZDG has long-run contracts in giving communal pathology to the Hawkes Bay, Otago-Southland, Lake Districts and Canterbury health boards. The company used to employ around 500 employees with around 19 pathologists. With these considerations, the report presents analysis of acquisition of NZDG by Healthscope Limited. This comprises of the main rationale behind the acquisition, acquisition technique used, the offer price, technique of payment the FVINA allocation as well as goodwill. It also presents market reaction toward the acquisition as well as analysis of the post-acquisition for up to three years (Canberra Times 2018). This assist in providing recommendation on whether the acquisition was value enhancing to the company’s shareholders.

The takeover was mostly aimed at helping Heathscope achieve significant rank within the pathology sector. In fact, given that Healthscope Limited main goals is to be the market leader in the pathology industry, acquiring NZDG would help it achieve this goal since it would add its radiology capacities to its main portfolio (Canberra Times 2018). Additionally, the acquisition was mainly aimed at helping the company achieve its key commitment to offer the leading edge services to all its clients which is one of its key requirements. The acquisition offers assurance to the continuing venture, substantial global involvement in the public pathology and chance for the NZDG employees in drawing on incomes as well as specialized proficiency in Healthscope’s prevailing maneuvers (Scoop Health 2008). The acquisition was also aimed at helping Healthscope cement its key position within New Zealand. Hence, the acquisition of NZDG offers further opportunity in establishing the Healthscope Limited as one of the significant player in New Zealand market (Business 2017). The acquisition was aimed at bringing about assurance to the continuing venture as well as noteworthy global involvement within the communal pathology and a chance for the NZDG employees to drawn on professional expertise and capitals inside the Healthscope’s current maneuvers (Reuters 2017).

Acquisition technique used

During the acquisition, the method used was off-market bid. This technique entails a process where the bidder that is the Healthscope made offer and largely controlled the takeover process (Scoop Health 2008). In this case, Healthscope was the main determiner of the takeover offer price, the offer period as well as the offer terms. This method was used since it does not at any point require any approval from the court or the target stakeholders. In fact, the stockholders had the option to either reject or accept Healthscope offer (Business 2017). To be more specific, Healthscope utilized the off-market bid in acquiring New Zealand Diagnostic since the technique is simple and less complicated in comparison to other methods of takeover (Vermaelen & Xu, 2014). In fact the method allowed for Healthscope to make distinct though identical offers to all the stakeholders of NZDG to acquire all the shares. This process was relatively short as a result of shorter lodgment period as well as quicker time in processing payments to the acceptable shareholders (Healthscope Press Release 2017).

The acquisition of NZDG was done at undisclosed amount. Nonetheless, goodwill arising from the acquisition as assets as well as carried at the costs is acquired less the accumulated impairment losses (Canberra Times 2018). In essence, goodwill was usually examined or assessed as extra amount of consideration transmitted, fair value of takeover firm or as amount of non-controlling interest in acquire. Besides, goodwill was allocated to every organization’s cash-generating units (Scoop Health 2008).

The amount of the goodwill allocated for the acquisition was justified. This is based on the fact that the amounts were tested for any impairment (Wines, Dagwell & Windsor 2010). Besides, the amount of goodwill was justified since amount was recognized against carrying value of the goodwill held by Pathology (Canberra Times 2018).

Whenever an organization acquires or takeover another firm, the market reacts in different manner. For instance, stock price of NZDG increases whilst stock price of the firms taking over declines or shrinks in short-run (Business 2017). The stock price of target firm increases since acquiring firm has to pay some premium for acquisition. The main reason for such premium is that shareholders of target firm, who are required to approve the acquisition, are implausible to approve the takeover unless stock price is considered to be above prevailing market price. In case, the acquisition bid equates to relatively lower stock price in comparison to current price of target firm, hence, there is very minimal incentive for current owners of target firm in selling their share to acquiring firm (Canberra Times 2018). As a result, with announcement of New Zealand Diagnostic, the market price of its shares increased since a huge number of potential investors were trying to purchase as many shares as possible in preparation of the takeover. In fact, there was a sharp increase in New Zealand Diagnostic shares after the announcement of its takeover by Healthscope. A huge number of investors were rushing to purchase the shares, hence, the increase in price (Scoop Health 2008). This was in anticipation that during the acquisition, they would sell their shares at relatively higher price; hence, making a good amount of return out of the investment.

Offer price

Healthscope Limited accomplished 27% decline in number of the lost time injuries within 6 months after acquisition compared to such activities in the previous years (Scoop Health 2008). The trend shows positive trend is observed over the last four years. Such decline is the actual injury occurrences are more impressive while considering growth with personnel, exposure opportunities and sites. During the post-acquisition, the company recorded an EBITDA of around $21.7 million which is a major increase of around $1.4 million in comparison to 2006 (Eriksen 2009). In addition, the acquisition resulted in revenue increase in Australian Human Pathology by around 5% to approximate $108 million. In fact, during the post-acquisition, revenue growth rate was mostly in line with sector average of around 7.6%, nonetheless, loss of revenue in the WA state was recorded. Furthermore, during the post-acquisition, pathology operations within Singapore and Malaysia have continued delivering excellent revenue and earnings growth, in spite of the adverse foreign exchange movements resulting from strengthening A$. Besides, since the post-acquisition, Healthscope Limited operations in Singapore have surpassed its expectations (Canberra Times 2018). Additionally, performance of the New Zealand Pathology operations has been significantly flat compared to previous year performance. For instance, Northland Pathology total revenue grew by around 10%, nonetheless, such growth has been offset by combination of the weakness resulting from drought in veterinary pathology market as well as increased rivalry for the vet markets.

Table 1: Revenue growth rate per region during and after the acquisition

 

Source: Eriksen (2009)

Furthermore, during the post-acquisition, Healthscope Limited skin cancer clinics and medical centers have substantially increased its reported revenue in comparison with previous year. The increase is significantly attributable to revenue from NZGD acquired in 2007. Moreover, during the post-acquisition period, Healthscope Limited is said to have attained significant growth in its revenue which was mostly attributed by combination of the revenue growth of existing portfolio and revenue from the acquisition completed.

Table 2: Performance before and after acquisition

Source: Eriksen (2009).

Besides, during the post-acquisition, Healthscope Limited achieved 17% growth in its EBITDA which was as a result of strong revenue growth rate as well as improved profit margin from the company grup together with full year contributions from the acquisition (Scoop Health 2008).

Table 3: EBITDA growth rate during the post-acquisition

Source: Eriksen (2009).

The takeover was value enhancing to Healthscope Limited shareholders since after the acquisition, the company has been able to accomplish significant growth in its revenue and income through with the assistance of its experienced team and professional who are mostly engaged in delivery of the quality healthcare to its clients, its policy of the selective growth as well as its responsible and well-structured financial management. Basically, the acquisition was value enhancing since it contributed to continued strong revenue growth rate and margin improvement from the company core operations. This is in turn said to be very beneficial to stakeholders since it would imply higher returns for their invested amount.

Goodwill

Furthermore after the acquisition, the EPS before significant items in 2007 was 15.6 which was 13% higher than 13.8 recorded in 2006. Its dividend increased with 1 cent or 12% over 2006 dividends. Besides, there was also recorded a significant increase in the company’s cash flow form the operating activities to around $61.2 million in 2007 from $53.8 million in 2006. This increase greatly reflects improvements in the operating activities from the company’s key operations as well as improved working capital over the period due to the acquisition of the NZDG.

Conclusion

In conclusion, NZDG takeover was mainly aimed at enhancing the company gain better rank within the pathology sector. It can also be stated that the takeover was mostly aimed at helping Healthscope become the market leader in the pathology industry since it would help it achieve this goal since it would add its radiology capacities to its main portfolio. Besides the main rationale of the acquisition was to help Healthscope achieve its key commitment to offer the leading edge services to all its clients which is one of its key requirements. As such, it can be concluded that the acquisition helped Healthscope Limited accomplish 27% decline in number of the lost time injuries. This trend shows positive trend which is more impressive while considering growth with personnel, exposure opportunities and sites. Furthermore, based on the above analysis, it can be concluded that the takeover was value enhancing to Healthscope Limited shareholders since after the acquisition, the company has been able to accomplish significant growth in its revenue and income through with the assistance of its experienced team and professional who are mostly engaged in delivery of the quality healthcare to its clients, its policy of the selective growth as well as its responsible and well-structured financial management.

References

Business (2017), Healthscope acquires NZ Diagnostics: Available from: https://www.smh.com.au/business/healthscope-acquires-nz-diagnostics-20071218-1hsb.html [Accessed at 24^th May 2018]

Canberra Times (2018), Health scope acquires NZ Diagnostics: Available from: https https://www.images.canberratimes.com.au/business/healthscope-acquires-nz-diagnostics-20071218-1hsb.html?deviceType=text [Accessed at 24^th May 2018]

Eriksen, MA (2009), Aussie bid to win back $560m lab pact: Available from: https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10483174 [Accessed at 24^th May 2018]

Healthscope Press Release (2017), Pathology Leader Buys NZ Diagnostics Group: Available from: https://www.scoop.co.nz/stories/GE0712/S00082.htm [Accessed at 24^th May 2018]

Reuters (2017), Healthscope says buys NZ Diagnostics Group: Available from: https://www.reuters.com/article/healthscope/healthscope-says-buys-nz-diagnostics-group-idUSSYU00368020071218 [Accessed at 24^th May 2018]

Scoop Health (2008), Healthscope Appeal In $560 Million Labtests Case: Available from: https://www.scoop.co.nz/stories/GE0805/S00021/healthscope-appeal-in-560-million-labtests-case.htm [Accessed at 24^th May 2018]

Vermaelen, T & Xu, M (2014), ‘Acquisition finance and market timing,’ Journal of Corporate Finance, 25, 73-91.

Wines, G, Dagwell, R & Windsor, C (2010), ‘Implications of the IFRS goodwill accounting treatment,’ Managerial Auditing Journal, 22(9), 862-880.