HCA, Inc. (A) Case Study Analysis
The maximum price that LBO firms should be willing to pay for HCA
The minimum price of the share using the discounted cash flow method is $47.41, which should be considered the minimum price to be offered by LBO firms to pay for HCA. While the maximum price is calculated using sensitivity analysis amounts $51.08 with a 4% risk free rate of return and 5% risk premium.
Fairness of offer
The pricerecommended by Merrill Lynch to the management of HCA ranges between $55 and $59. This offer is high because of the certain issues in projections detected by McKinsey, however, the report was available to the private equity firms. Additionally, the price should be compared with the price calculated using the discounted cash flow model, which is $47.41. It is because DCF method is forward looking approach & it highly depends on the future projection rather than the historical values. Additionally, the DCF Method is focused on generating cash flows and is less affected by the policies of accounting. The private equity firm has offered $50.70 price/share which is fair from the viewpoint of shareholders.
Reasons for shareholders to be concerned about the LBO process
The reason for shareholders concern about the LBO processis that the shareholders might face blunted prospects for the growth of the company. Also, the shareholders also considered that if the sale of an asset isinsufficient to meet the payment of interest arising from a high debt level, the LBO might fail and the company might go bankrupt. Paying a high rate of interest in LBO debt could damage the credit rating of the company.
Recommendations
If I was the member of the special committee evaluating the proposed LBO, I would have recommended that the proposed deal should be approved due to the fact that the maximum price per share calculated using the DCF method is near to the proposed deal. The proposed deal would be beneficial for the shareholders and other parties as well................................
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