Healthcare Business Survival Through Restructuring

Dr. Elijah Ezendu FIMC, FCIM, FCCM, FIIAN, FBDI, FAAFM, FSSM, MIMIS, MIAP, MITD, ACIArb, ACIPM,

PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC

“You will either step forward into growth or you will step back into safety.” – Abraham Maslow “Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” – Benjamin Franklin “The strongest principle of growth lies in the human choice.” – George Eliot “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” – Charles Darwin

Ice Breakers

What is Restructuring?

“Restructuring can be construed as action for change in financial structure, business portfolio or ownership so as to increase the value of a firm.”

Source: Elijah Ezendu, Restructuring “A significant modification made to the debt, operations or structure

of a company. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and improve the business.”

Source: Investopedia “A fundamental change in the way in which an organisation is

structured that may involve increasing or decreasing the various layers of staff between the top and the bottom of the hierarchy or re-assigning roles and responsibilities within it.”

Source: HRdictionary.com

Driving Forces of Restructuring

Advancement in Technology Stock Market Increasing Competition Globalization Regulatory Shift Inability to Attract the Right Experts Evolution of Subsidiaries Correction of Valuation Blunder Decision-Making Dynamics Structural Paralysis Rambling Business Model Collapse of Strategy Industry Trend Utilization of Opportunities

Financial Perspective of Restructuring

Assets Liabilities

Operating Cash Flows

Debt

Equity

Either Reorganize

the Business

Or Reorganize

the Financing

Types of Restructuring

1. Portfolio Restructuring: Reducing or Increasing a firm’s business. For example, acquisition or spin-off

2. Financial Restructuring: Altering a firm’s capital structure. For example, LBO

3. Organizational Restructuring: Rearranging the organizational structure, system or design template of a firm. For example, downsizing.

Alliance

Alliance is definite agreement between firms such that each shall commit resources to achieve common set of objectives.

Alliance in Medical Practice

Alliance provides unlimited opportunities for medical practitioners to build, nurture and harness partnership resources for resolution of effectual synergies, in pursuit of individual career objectives.

Operational

Resource Efficiency

Mitigate against Performance

Gap

Cost Management

Improve Asset Utilization

Boost Core

Competence

Strategic

Protection

Strategic Intent

Opportunities for

Growth

Diversification

Visionary Stride

Rationale for Alliance

10 Steps to Successful Alliance

i. Establish clear strategic purpose ii. Find a fitting partner iii. Allocate tasks according to competencies iv. Create incentives for cooperation v. Minimize conflict between partners vi. Encourage continual communication vii. Exchange personnel viii. Operate with long time horizon ix. Develop multiple joint projects x. Be flexible

Determinants of Success in Alliance

Strategy

Relationship

Finance

Legal Framework

Structure

Rationale

Capability

Culture

Source: Elijah Ezendu, Alliance Development

Alliance

Types of Alliance

1. Joint R & D 2. Licensing 3. Preferred Suppliers 4. Co-Marketing 5. Coopetition 6. Minority Investment 7. Joint Production 8. Equity Joint Venture 9. Multi-Partner Consortia 10. Outsourcing 11. Collaboration

Collaboration in Medical Practice

Collaboration is one of the most extensively implemented alliance in medical practice. It allows for practitioners to leverage expertise of others so as to provide an endearing level of customer satisfaction to clients.

“To increase access to health care, enhance quality and manage costs, we must embark on a process of collaboration and interdependence.” - Prof Morgan Chetty, Practice Matters: Collaboration and Interdependence ( Medical Chronicle)

Types of Collaboration

• Loose Collaboration • Definite Collaboration

Loose Collaboration

This is an unstructured agreement between two or more practitioners/clinics/medical centers for handling cases together or effecting referrals. It’s usually established through ‘word of mouth’ engagement devoid of broad clarification. The major problems of loose collaboration stem from challenging expectation management and lopsided consideration.

Definite Collaboration

It’s a structured agreement between two or more practitioners/clinics/medical centers for handling cases together or effecting referrals. It should feature a clear framework of relationship showing standard of work, performance expectations and mutually acceptable consideration well-crafted as tenets of an endorsed Memorandum of Agreement (MOA).

Benefits of Collaboration • Provides enablement for achievement of

customer-centred service. • Enhancement of customer satisfaction. • Facilitates management of clients (patients)

throughout the collaborative value network. • Gives room for accelerating quality of service

throughout the collaborative value network. • Boosts interdisciplinary communication and

productivity. • Builds a lock-in system for promoting customer

engagement

Exercise

Dr Johnson is a medical practitioner, who owns a small-size clinic that has a ward-strength of 6 patients. What alliances can he develop for enhancing total services?

The Phases of Alliance

Alliance Design Alliance

Implementation Alliance

Management

Interconnectivity of Strategy and Capability

Competitive Strategy

Alliance Capability

Alliance Strategy

Alliance Design

Alliance Implementation

Alliance Management

Review

Factors that Determine the Right Partner

i. Complimentary objectives ii. Complimentary capabilities iii. Proportionate risks iv. Controllable rivalry v. Compatible management styles

Problems of Strategic Alliances

Risk of too much dependence Risk of skill drain High cost of operations Difficulty in integration Risk of losing secrets Incompatibility of firms Absence of clear details of

responsibilities

Coopetitive System of Value Creation

This is a strategic interdependence that emerges between diverse firms due to blending of competition and cooperation.

Competition Cooperation

Coopetition

Source: Elijah Ezendu, Restructuring

Coopetition Strategy

Coopetition strategy is a type of inter-firm strategy which permits and constrains the competing firms involved in alliance to manage a partially convergent interest and goal structure while creating value by means of coopetitive advantage.

“The physicians find themselves in certain situations where cooperation is appropriate. A strategic relationship with a hospital may require some occasions of cooperation where partnering on a joint venture may bring a new service to the community while simultaneously competing with the same hospital to provide a different outpatient service.” - Grace Terrell, Time for Coopetition is Now

“Do other opportunities exist for coopetition in wound care? I believe they do. Let's consider the possibilities for a moment. Visualize an ever-expanding global wound care pie, with its slices representing patients, practitioners, manufacturers, educational conferences, and accreditation and certification programs. Imagine more and more entrants to the wound care industry, joining forces with each other to gain a piece of the greater pie.” - Richard Salcido, Coopetition in Wound Care

Mergers and Acquisitions

A merger occurs when two or more firms agree to move forward as a single new organization, instead of remaining separately owned and operated.

Acquisition occurs when one firm takes

over another thereby establishing itself as the new owner.

Reasons for Mergers and Acquisitions • Financing • Speedy external growth • Risk Reduction • Availability of exploitable situation • Competition • Hubris Hypothesis • Sales enhancement and operating economics • Improved management • Better information about profitability and position of business • Staff reduction • Wealth transfer • Management personal agenda • Acquisition of superior technology • Taxation • Diversification

“The rules of healthcare are changing. Today, growth isn’t about just getting bigger. It’s about developing all of the components needed for coordinated care and reduced costs.” - Source: HealthLeaders Media, Hospital Merger and Acquisition Strategies

Merger and Acquisition Deal

Closing the Deal Acquiring company pay for the target firm with cash, stock or both. A holding company may be formed to issue its shares in

exchange for those of the two merging firms.

Targets Response

Options: Accept the terms, attempt to negotiate, execute a poison pill or find a White Knight

The Tender Offer

Based on conclusion through interplay of financial advisers, investment bankers and firm

Types of Mergers The following are distinguished by relationship • Horizontal Merger • Vertical Merger • Market-Extension Merger • Product-Extension Merger • Conglomeration The following are distinguished by financing • Purchase Merger: A firm pays for another with cash

or debt instrument such as bills, bonds, certificates of deposit, banker’s acceptances

• Consolidation Merger: Merging firms are bought and combined under new entity

Types of Acquisition • Conventional Acquisition: A firm buys another with

cash, stock or combination of the two. • Acquisition by Asset-Purchase: Company A buys all

the assets of Company B for cash, then Company B will have only cash (and whatever debt they had before) and become a shell, which may eventually liquidate or enter another area of business.

• Reverse Merger: A private firm in a bid to raise financing buys a publicly listed shell firm, and moves thereinto in so doing become an entirely new firm with tradable shares.

The Rise of Fortis Global Healthcare Holdings Pte Ltd Through Acquisition

Fortis acquired Hong Kong-listed Quality Healthcare Asia Ltd (QHA) for about Rs 882 crore. With this Fortis Global got a network of over 60 wholly-owned medical centres, over 500 affiliated clinics, over 40 dental and physiotherapy centres, and a private nursing agency with a database of over 3,000 nurses in Honk Kong. Then it offered to pick up controlling stake in the Australia based Dental Corporation. Dental Corporation is the largest operator of dental practice in Australia and New Zealand with presence in 135 locations. Fortis Global has also announced the acquisition of a cancer speciality hospital project in Singapore for Rs 115 crore.

Adapted from The Hindu Business Line

Competitive Intelligence in Inter-firm Relationships Competitive Intelligence should be used for generation of equitable due diligence

report highlighting the following: Return on Investment (ROI) Compounded Annual Growth Rate (CAGR) Gross Profit Margin (GPM) Production Capacity to Fill Product/Services Mix Cost Structure Customer Satisfaction/Loyalty Intellectual Property Portfolio Competitive Differentia Corporate Culture Talent Mass People/Knowledge Acquisition Employee retention Liabilities Deal complexity and risk Ownership structure Strategic Motive of Relationship Ascertainment of Strategic gap, which is the difference between current and

desired state.

Why M & A Fails 1. Deals done due to highly rated stock without proper strategic

analysis 2. Imitation of industry trend 3. Action was driven by idiosyncrasy instead of business strategy 4. Action was done for personal glory 5. Erroneous influence from bankers, advisors and lawyers 6. The goal of buying a stiff competitor can be misleading 7. Fear can induce firms into defensive mergers 8. Post-Merger problem of managers trying to cope with integration 9. Irreconcilable differences in corporate culture 10. Focus on cost-cutting while neglecting revenue momentum 11. Passion of top management for deal bonus regardless of outcome 12. Lack of communication 13. Incorrect due diligence report 14. Loss of key personnel

Divestiture

This is the outright sale of a firm’s asset, division or subsidiary either as a fundraising measure or strategic alignment aimed at eliminating unfit organizational components or in defense against take over or due to low profitability.

Equity Carve-Out

A parent firm makes a subsidiary public through IPO, and selling small percentage to the public while keeping controlling stake.

Reasons for Equity Carve-Out

i. Focused management ii. Unlocking hidden value iii. Tax Factors iv. Impetus of growth strategy v. Lack of strategic fit

Starbursting

This is the break-up of a star-like firm into smaller firms by delineating core business and a collection of other focus areas, giving room for the parent company to concentrate only on its core business and allow relevant business units to spring up as individual firms, wherefore each would concentrate on applicable focus area.

Advantages of Starbursting

• Development of Focused Management • Effective Distribution of Corporate Debt • Development of Specialised Talents • Reculturalization of Business Unit to Best Industry Fit

Instead of ‘One-Size Fits All’. • Leadership Devolution to Business Unit. • Boosting Aggregate Value for Shareholders. • Increase in Operational Efficiency • Appropriate Strategic Positioning to Explore and

Exploit Each Focus Area.

Spin-Offs

This occurs when a subsidiary becomes independent company through distribution of its shares to shareholders of the parent firm, usually on a pro rata basis.

It can’t be used for immediate fundraising.

Other Forms of Restructuring

MBO EBO LBO ESOP Exchange Offer Troubled Debt Restructuring Workout Liquidation

Rightsizing

This involves ascertainment of targeted service requirements, implementation of workload mechanics for identifying distinct job contributions, execution of job redesign for effectuality, repositioning of job roles and development of performance-fitting structure.

Rightsizing usually give rise to shrinking of oversize units, expansion of understaffed ones, as well as establishment of new essential sections or departments.

Downsizing

It’s a type of organizational restructuring that focus on streamlining, tightening and shrinking organizational structure with respect to workforce.

Alternatives to Downsizing • Early retirement as a method for inducing voluntary

shrinkage • Establishment of programmes for trimming waste • Across-the-board salary cut. • Perform hiring-freeze and halt recruitment. • Retraining employees, and adjust them strategically • Transfer of employees from area of non-requirement

to necessities • Reduction of the work-week • Reduce the size of workforce by attrition • Implement furlough • Introduce contract labour into the workforce

Case Examples

1. Acquisition of Regency Hospital Company LLC by Select Medical Holdings Corporation thereby expanding network of acute care hospitals from 89 to 112. Value of deal was $210 million. Deal Date: June, 2010.

2. Acquisition of RehabCare Group by Kindred Healthcare Inc for the purpose of penetrating the market, reducing cost, while expanding offerings and operational locations. Value of Deal was $900 million. Deal Date: Feb, 2011.

Case for Review Zinohive Medicare is a healthcare business that provides services in 10 locations. It operates the following specialised centres: 1. Trauma Centre 2. Wound Healing Centre 3. Paediatric Centre 4. Cancer Centre 5. Heart Centre 6. Maternity The management intends to enhance total value to shareholders and boost service growth. In your viewpoint, what is the best restructuring option for the organisation?

Thank You

For additional information: Dr. Elijah Ezendu

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