HCA, Inc. LBO Exit – Case Solution

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HCA, Inc. LBO Exit Case Answers

Introduction – HCA, Inc. LBO Exit

HCA Inc. (also known as Hospital Corporation of America) is a for-profit operator of hospitals and healthcare facilities globally. Founded in 1968, HCA, Inc. grew explosively to become one of the few remaining for-profit operators in the U.S. leading up to the 2006 buyout. This was chiefly due to an overall vertical consolidation throughout the healthcare industry.

Immediately leading up to the 2006 buyout, HCA, Inc. was struggling with overwhelming bad debt expenses paired with a growing number of patients being treated coming in uninsured.

Before and during this decline in a span of two years (2004 and 2006), HCA undertook two large stock repurchases at a total cost of over $6 Billion. However, by 2005, HCA leadership decided that stock repurchases going forward were unlikely to increase overall stock price, so operations ceased leading up to the BOFA buyout.

After following through with this proposed exit strategy, HCA began researching having Bank of America allow HCA to re-acquire the large Equity stake in the firm.

A re-acquisition of this size would have significant effects across the market if it were to be approved before the next trading day, as outlined by Milton Johnson.

In July 2006, the board of HCA, Inc. agreed to an LBO with a total transaction value of $33.2 Billion. This deal was made up of three different private equity firms providing direct equity investment.

Following this deal, overall HCA performance improved drastically with new targeted ad campaigns and lower Emergency Room wait times, drastically increasing hospital throughput. This resulted in a very positive effect on the free cash flow of the firm.

The biggest issues here are the timing and repurchase price for the firm. If the timing were to be gotten incorrectly, there might be a drop in HCA, Inc.’s stock price, causing people to believe that BOFA sold at a premium.

This could obviously result in flagrant accusations throughout the industry and media of both participating in “Greenmail.”

Analysis

A few of the most important factors to consider are the institutional investors involved as well as their associated reactions to a decision, the relatively low trade volume for the stock, and perceived growth on behalf of the board of directors.

The board of directors of HCA, Inc. believes strongly that…