Global Testing Geneva Ltd. Background. The Global Testing Geneva (GTG) was established in Switzerland in 1893, by

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Global Testing Geneva Ltd. Background. The Global Testing Geneva (GTG) was established in Switzerland in 1893, by two brothers who married into a wealthy family organization.

The company had developed as a global organization for inspection and testing with 40,000 employees worldwide. The core service that was provided was Inspection of International trade to ensure that governments collected the appropriate amount of Customs duty and minimized and illegal profiteering by customs officers.

The company had also acquired a professional certified certification organization. That reviewed ISO 9000 standards requirement and implemented ISO 9000 standard systems. As the result of his inspection services the organization had increased as a global organization across a number of countries. In the 1990sthe granddaughter of the founders who now was the CEO of the company introduced a strategy of corporate entrepreneurship across all international subsidiary organizations.

In New Zealand, the company was founded on the back of traditional inspection and testing with most of the organization focused on the testing of primary products such as wool agricultural products, coal, steel and minerals. The revenue for the group was low at $25m NZD.

On one occasion the CEO of GTG New Zealand while held up in a traffic delay, noticed the signage on the back of a vehicle as med lab, Auckland with a tag line of “testing for life”. Immediately recognizing an opportunity, he followed the vehicle, recognizing that the word testing was Core activity of the organization, not only in New Zealand, but worldwide. As the result of this Inquisitive and entrepreneurial approach, GTGNZ was granted permission by head office in Geneva to actively pursue the acquisition pathology laboratories across New Zealand.

Your role

You have just accepted the role. Is an expatriate from Australia to New Zealand as the Finance manager for GTG New Zealand Ltd.? Your first task is to assist with the analysis of three potential pathology laboratory acquisitions.

There are three specific Acquisition targets as follows.

I. Med lab Auckland

2. Regional Pathology

3. Auckland Pathology.

The current ownership of each pathology business was by a number of doctor- pathologists working in a partnership arrangement at each organization. No doctors have ownership or partnership in either of the other businesses.

Business Model

While the acquisition process was quite clear, the technicalities involving acquiring a professional health services organization involving pathology was quite involved. The key issue that GTG New Zealand faced was that it did not have doctors on their staff and were ill qualified to run a testing laboratory which involved decisions that could have potential high risk effects on individual’s health.

As a result of negotiations with the government Health Department revealed that an alternative business model could be adopted to achieve the required involvement of qualified medical doctors.

The proposed acquisition corporate venturing model involved establishing a separate legal entity to act as the acquisition vehicle. The owner doctors transferred their partnership share of the asset into the vehicle and received shares amounting to 33% of the value of the acquisition.

GTGNZ held the majority of the remaining 67% of the acquisition as a majority shareholder.

The details for each of the Pathology labs are attached on Appendix one, two and three.

You’re Task

As the Finance Manager, your task is to assess which of the potential acquisition targets was the most suitable for GTG Limited. In order for you to accomplish this task. You will be required to adhere to the specific acquisition guidelines policies of GTG Limited.

You will be required to:

1. To determine the free cash flows from each of the potential acquisition targets-use excel spreadsheet to detail calculations.

2. To evaluate the proposals.

a. Firstly, based on a payback methodology, in order to eliminate those potential acquisitions which do not fall into a three year payback period (using simple payback method). This is in line with the global requirement from GTG, Switzerland and as such serves as a minimum requirement before any acquisitions can undergo any further analysis.

b. Once having identified and screened the proposed acquisition targets through a Payback analysis the next step is to identify a net present value of the acquisitions based on the information provided.

c. In order to calculate the net present value in relation to each of the selected proposals the organization requires a minimum of the weighted average cost of Capital plus a risk premium 2%. This will satisfy shareholders return in Geneva.

Details of the Capital structure of the GTG are as follows.

Financing type Market value 000’s cost Share $5,000 9% Debt $20,000 5.5%

3. Prepare a board report the directors can review which highlights your recommendation based on your calculations. In addition, raise any concerns you may have other than quantitative analysis.

ACQUISITION PROPOSAL 1

NAME; MEDLAB AUCKLAND

LOCATION; 10 Grafton St, Auckland

The initial discussions have been undertaken with the owner doctors under a strict confidentiality agreement. Information regarding MA has been summarized below.

Interestingly the owner doctors approached senior staff at GTG initiating discussions regarding a potential sale.

BACKGROUND

The Company was founded by three doctors/pathologists and has been in operation for 15 years. The organization which trades as a company has developed significant goodwill over time.

Unfortunately, the main laboratory premises have become run down and the collection rooms have deteriorated and complaints about the nurses performing the sampling were growing.

The industry is capital intensive in terms of the development of new technology and diagnostic equipment.

The following information was based on the 2020 data.

Number of staff (including collection nurses) 150

Owner Doctors 3

Pathologists 6

Collection centers 15 Average number of customers/patients per annul 25,000

Average tests per patient 2.3

Average revenue per test $45

FINANCIAL DATA

Overall, the company based on initial discussions has been performing well, however market share is lower compared to its main competitor.

The following forecast of data has been provided by the company and has been set out below.

2021 2022 2023

Revenue $ 2,500,000 $ 2,800,000 $ 3,100,000

Operating Expenses $ 2,100,000 $ 2,300,000 $ 2,450,000

EBITDA $ 400,000 $ 500,000 $ 650,000

Deprecation and Amortization included in expenses $ 150,000.00 $ 130,000.00 $ 110,000.00

Notes;

1. The tax rate is 30% for the organization

PROPOSED ACQUISITION DETAILS

From initial discussions the purchase price to be offered by GTG was based on a multiple of 3 times average earnings of the last 3 years $300,000. This provides a potential purchase price of $900,000.

Further the owners of MA had indicated that there was a need to upgrade the premises and this had been planned in 2023, together with the upgrade of new equipment. This is a condition that would form an integral part of the acquisition. Details of the capital expenditure are as follows.

Purchase of land 400,000

Construction of building 600,000

Replacement and upgrade computer system 300,000

Total 1,300,000

For the purpose of evaluating the cash flows and NPV analysis the expenditure is assumed to occur at the end of year 2023.

OTHER INFORMATION

A large organization with several departments, somewhat mechanical bureaucratic in nature. While a larger organization than the other two proposals, market research has identified that the med lab does not have good reputation amongst the referring doctors, in terms of test turn around.

Appendix 2 ACQUISITION PROPOSAL 2

NAME; AUCKLAND PATHOGY

LOCATION; 2 Green lane St, Auckland

The initial discussions have been undertaken with the senior management and owner doctors under a strict confidentiality agreement. Information regarding AP has been summarized below. Interestingly the owner doctors approached senior staff at GTG initiating discussions regarding a potential sale.

BACKGROUND

The company was founded by five doctors and has been in operation for in excess of 10 years. The organisation which trades as a company has developed significant goodwill over time.

The industry is capital intensive in terms of the development of new technology and diagnostic equipment.

The brand goodwill as such was seen to be declining as perceived by the directors of GTG Ltd. The following information was based on the 2020 data.

Number of staff (including collection nurses) 300

Owner Doctors 5

Pathologists 8 Collection centers 25

Average number of customers/patients per annum 20,000

Average tests per patient 3

Average revenue per test per annum $30

FINANCIAL DATA

Overall the company based on initial discussions has been performing well, however market share is lower compared to its main competitor.

The following forecast of data has been provided by the company and has been set out below. Notes;

1. The tax rate is 30% for the organization

2021 2022 2023

Revenue $ 5,200,000 $ 5,650,000 $ 5,750,000

Operating Expenses $ 4,700,000 $ 4,900,000 $ 5,100,000

EBITDA $ 500,000 $ 750,000 $ 650,000

Deprecation and Amortizations included in Operating expenses $ 250,000.00 $ 225,000.00 $ 200,000.00

PROPOSED ACQUISITION DETAILS

From initial discussions the purchase price to be offered by GTG New Zealand was based on a multiple of 3 time’s average earnings of $450,000 over the last 3 years. Giving an acquisition price of $1,350,000.

OTHER FACTORS

A well-established organization with high revenue.

Appendix 3 - ACQUISITION PROPOSAL 3

NAME; REGIONAL PATHOLOGY (RP)

LOCATION; Base hospital Palmerstone North

The initial discussion has been undertaken with the senior management and owner doctors under a strict confidentiality agreement. Information regarding RP has been summarized below.

BACKGROUND

The company was founded by four doctors and has been in operation for 10 years. The organization which trades as a partnership services the central region of the North Island of New Zealand. With the exception of a number of small laboratories RP has no real competitors. Situated in the base hospital (for which RP pays a commercial rent) the laboratory services the needs of the hospital and the local doctors in the region.

The industry is capital intensive in terms of the development of new technology and diagnostic equipment.

Collection rooms;

Note there are minimal numbers of collection rooms as the regional doctors collect in their own surgery and the hospital has specific rooms dedicated for sample collection.

Many of the equipment is leased from the hospital on a commercially favorable basis, however this is a month to month basis and will need to be negotiated if the RP was to be acquired.

The following information was based on the 2020 data.

Number of staff (including collection nurses) 10

Owner Doctors 4

Pathologists 2

Collection centers 10

Average number of customers/patients per annum 20,000

Average tests per patient 3.0

Average revenue per test $50

FINANCIAL DATA

The following forecast of data has been provided by the company and has been set out below;

Notes;

1. The tax rate is 30% for the organization. 2021 2022 2023

Revenue $ 1,500,000 $ 1,750,000 $ 2,000,000

Operating Expenses $ 1,200,000 $ 1,300,000 $1,450,000

EBITDA $ 300,000 $ 450,000 $ 550,000

Deprecation and Amortization included in Operating Expenses $ 100,000.00 $ 80,000.00 $ 75,000.00

PROPOSED ACQUISITION DETAILS

From initial discussions the purchase price to be offered by GTG was based on a multiple of 3 times earnings $275,000, giving an acquisition price of $825,000.

OTHER FACTORS

A low fixed cost business model makes this attractive with the major variable costs which can be managed effectively to meet demand as required and optimize profit. The doctor owners perform the majority of the tests, themselves eliminating the need for additional pathology staff.