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Transcript of Ashok Bhardwaj Abbott, Ph.D., Focus on Healthcare Consulting Seminar Series National Association of...
Healthcare Finance: ROFO and ROFR
Agreements in AcquisitionsAshok Bhardwaj Abbott, Ph.D.,
Focus on Healthcare Consulting Seminar SeriesNational Association of Certified Valuators and
Analysts Thursday, December 6, 2012
Ashok 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.
Health Care Expenditure ( $ Billions)
Year National health care expenditure
Hospital care
Physician and clinical
services
1980 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
Annualized Growth Rates
Year National health care expenditure
Hospital care
Physician and clinical
services
1980-2009 8% 7% 8%
2000-2009 7% 7% 6%
2005-2009 5% 6% 5%
Health Care Utilization EvolutionHealth care Utilization 1980 2000 2005 2009
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
Changing 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.
Market ConsolidationLargest 50
participantsNumber 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
growth4.9% 7.1% 0.5%
Ambulatory health care
services10,779 15,403 48,874 72,311 10 10.8
growth7.1% 7.8% 1.5%
Physician offices2,738 3,976 22,376 37,047 9 11
growth7.5% 10.1% 4.0%
Growth 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.
Consolidation 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.
Acquisition 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.
Health care acquisition landscapeHealthcare acquisitions are subject to
considerable regulatory hurdles.Anti-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.
First 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.
Two 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.
Right 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.
Strategic 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.
Right 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.
Strategic 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.
Comparing 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.
Comparing 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.
Pricing 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.
Valuing 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.
Valuing 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.
Option 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.
Questions?Please do not hesitate to contact us for any
clarifications.Ashok Bhardwaj Abbott Ph.D. MBAEmail [email protected] Phone 304 692 1385