Question

Hospital chain HCA relied heavily on revenue growth in its effort to take the firm private. On July 24, 2006, management again announced that it would “go private” in a deal valued at $33 billion, including the assumption of $11.7 billion in existing debt. Would you consider a hospital chain a good or bad candidate for an LBO? Explain your answer.

Answer 1

Answer :- It depends on whether or not the hospital meets the features of good candidates of LBO. These features include following :-

Good predictable cash flows in future :- If a firm has good amount that means sufficient amount of cash flows then it is able to pay the timely interest payment of loans

Large amount of assets for colleteral :- A firm has a sufficient amount of assets which it can gives as a security for taking the loan

Have a potential or capability to reduce expenses :- A firm has a full potential or has a capability or have a good staff which helps to reduce the expenses . The reduction in expenses helps in saving of more cash flows which is helpful for the early or timely repayment of loan.

Low future requirements of capital :- If a company has low future capital requirements then it can easily or sufficiently can pay the debt.

Good or powerful position in market :- If a company has a powerful market position then it helps the target company not to disposed after the leveraged buyout goes through. That position helps to make less risky cash flows.

So if a hospital has all these features and some other also apart from this like as limited working capital requirements then a hospital chain is good candidate for an LBO otherwise not.