Evaluation of Health care organizations mergers
Mergers and acquisitions refer to consolidation of assets or companies (Gomes, et al., 2013). Different transactions are classified under the term ‘mergers and acquisitions’. A merger means combining two businesses to form a completely new business. Acquisition, on the other hand, refers to one business buying another one and no new business is formed (Gomes, et al., 2013). Different transactions such as consolidations purchase off assets, tender offers, and management acquisitions may occur during the process (Vazirani, 2012). Acquisition and mergers are done by companies to increase growth, sharpening business focus, eliminating competition, and to increase productivity (Gomes, et al., 2013). This paper discusses the concept of mergers and acquisition and their application to the healthcare sector in deriving operational and financial efficiency as well as providing opportunities to gain market share.
Key Financial Drivers That Cause Health Care Organizations to Merge
Healthcare organizations may merge for synergy purposes. Such organizations merge by combining their business activities leading to performances that increase productivity. In the same process, incurred costs also decrease significantly. As Gomes, et al. (2013) outline, in most cases, organizations merge with those that have complementary weaknesses and strengths. The end result is that the merger incorporates the strengths of both organizations (Gomes, et al., 2013). The weaknesses of the two healthcare organizations are also rectified so that they may form one stronger and bigger organization.
Elimination of competition is also a key financial driver that causes health care organizations to merge. According to Gomes et al., (2013), most companies form merging deals to acquire a company that poses threat to them. In such cases, a healthcare organization may merge with another so that it may eliminate future competition. Such a merger may also be meant to gain a large market. The target company is usually paid significantly a higher compensation to accept the offer. By eliminating future competition, a health care organization is also able to increase sustainability and profits earned (Gomes, et al., 2013).
Diversification is also a key reason as to why two healthcare organizations may merge. It mostly happens where two businesses offer different types of goods and services. Merging, in this case helps a health care organization to provide those type of services that it was not previously able to provide before. As such, the merger helps save on the amount of money that could be spent on launching new services (Gomes et al., 2013). The newly formed health care organization is able to penetrate key market areas of operations thus increasing productivity.
Evaluation of Mergers
In evaluating the performance of a mergera merger, the first step would be to obtain the organization’s financial statements. Vazirani (2012) posit that important details such as cash flow, expenses, debt, and average revenue should be evaluated so that comparison may be made between the newly formed organization and the previous separate organizations. If the newly formed organization leads to increased productivity, customers, profits, and serving a wide range, then it is said to be successful. Determining the trend in the financial statements also helps to show whether the organization is advancing positively.
Making an analysis of the merged cash flow statement also helps to determine the direction of the new merger. Changes made in the interest rates as well as tax rates should be looked at when making an analysis of the income statement. A financial analyst also looks at whether the new merger is able to pay lenders and whether it is able to fully sustain itself (Vazirani, 2012). If the merger has a constant cash flow that allows the business to run without debts, then it is said to be successful.
A financial analyst will also look at the income statements from the newly formed merger to determine the organization’s profitability. Expenses are also looked at to determine whether the merger is using resources wisely. Vazirani (2012) asserts that special attention is also paid to income and tax expense lines. Increased revenue shows that the merger has improved its operations by getting a larger market share, decreased headcount-related costs, and decreased overhead cost. If the new health organization makes increased profits as shown through the income statement, then it is predicted that the business will perform well in future.
Factors That Drive the Financial Planning Process
Having a close look at the balance sheet is important to an organization in its post-merger phase. Gomes et al., (2013) show that analysis of the balance sheet helps to evaluate major assets such as equipment and land. It also helps in evaluation of debts where the organization determines how much it has and its real capability. With the income statement, both previously merging organizations can add their separate sheet items to come up with a combined balance sheet. After seeing the separate balance sheets for the merging companies, targets are set to ensure that the newly formed merger works towards attaining the goal.
Financial statements are important in the evaluation of a merger’s financial capability. The companies combining to form a merger should exchange their financial statements so as to compare the revenue earned from the newly formed merger and the when the companies existed separately. Doing so helps to determine the trend and to find out the profitability of the new merger. In case any problems are identified; ways of solving them are established to avoid future losses (Gomes, et al., 2013). Any changes that may lead to increased profitability are also identified and worked upon to ensure sustainability of the new organization.
In the post-merger phase, it is important to pay attention to different factors that ensure that all operations run smoothly. Some of the important things to consider include allocation of responsibilities, filling the management positions, harmonizing separate units from former organizations, and implementing the new management culture and the shared corporate culture (Gomes, et al., 2013). Other important operations include communicating new strategic objectives, overcoming cultural differences and language barriers, knowledge transfer, maintaining customer relations, and overcoming staff suspiciousness (Gomes, et al., 2013). Such activities help the merger to run smoothly thus leading to increased profitability.
The Value of Financial Planning to Health Care Organizations
Financial planning is important to health care organizations because it helps to determine long-term and short-term financial goals in addition to creating a well-balanced plan to meet the set goals. Vazirani (2012) notes that through financial planning, it becomes easy to manage income through effective planning. Allocation of funds to different activities is prioritized thus ensuring that the most important activities are dealt with first. Managing incomes also helps healthcare organizations to understand the amount of money that it needs to pay taxes (Gomes, et al., 2013). When a certain amount of money is set aside to pay taxes, it becomes easy for the organization to work according to the set policies and government laws. Additionally, financial planning helps such health care organizations to determine the amount of money that should go to savings and expenditures . Through determining expenditures and savings in advance, the organization grows bigger with time.
Financial planning helps health organizations to determine which type of investments it should make and the ones that may not be profitable to them. A good financial plan helps a health care organization to make considerations of risk tolerance, objectives, and future goals (Gomes, et al., 2013). The financial plan guides to choose the type of investments that will make the organization to grow significantly and those that fit its goals and needs. Making well informed decisions on the type of investments to make is important because it leads to increased productivity (Vazirani, 2012). With proper investments, the health care organization is able to serve a wide range of patients with different problems thus increasing profits earned.
Prediction of Financial Stability of the Health Care Industry in the Next Five Years
Using Total assets/Working capital ratio helps to determine how an organization is running. Understanding total capitalization relative to net liquid assets helps determine the trend of the operations of the organization (Chouhan et al., 2014). Working capital in this case refers to difference between current liabilities and current assets. Size and liquidity characteristics should be considered. If the health organization does not experience consistent losses in operation, it will have a positive relationship between total assets and current assets which mean that the organization is continue to operate well (Chouhan et al., 2014). If there is a good relationship between total assets and the net working capital, the healthcare organization is likely to conduct successful operations.
The other important things to consider include determining the relationship between total assets and retained earnings. According to Chouhan et al. (2014), the measure of cumulative profits earned over a certain period is an important ratio to consider. The age of the health care organization is considered in this situation. If the organization is new it will show a low total assets/retained earnings ratio since it has not built up enough cumulative efforts. If the organization has been operation for more than three years, it should reach a certain level of RE/TA ratio (Chouhan et al., 2014). If the healthcare organization has built up little profits for about five years, it may not be successful in the long run. If losses are made, it also means that different measures should be taken to avoid future losses and closure. A firm with a high RE/TA ratio is likely to be successful in the long run.
References
Chouhan, V., Chandra, B., & Goswami, S. (2014). Predicting financial stability of select BSE companies revisiting Altman Z score. International Letters of Social and Humanistic Sciences, 15(2), 92-105.
Gomes, E., Angwin, D. N., Weber, Y., & Yedidia Tarba, S. (2013). Critical success factors through the mergers and acquisitions process: revealing pre‐and post‐M&A connections for improved performance. Thunderbird International Business Review, 55(1), 13-35.
Vazirani, N. (2012). Mergers and Acquisitions Performance Evaluation-A Literature Review. SIES Journal of Management, 8(2), 37-42.
