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. 1 | P a g e 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 1990s the granddaughter of the founders who now was the CEO of the company introduced a strategy of corporate entrepreneurship across all international subsidiary organisations. 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. Medlab, Auckland with a tag line of. testing for life. Immediately recognizing an opportunity, he followed the vehicle, recognising that the word testing was core activity of the organization, only in New Zealand, but worldwide. As the result of this Inquisitive and entrepreneurial approach. GTG NZ 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. 1. Auckland Pathology 2. Regional Pathology The current ownership of each pathology business is by a few doctor- pathologists working in a partnership arrangement at each organisation. No doctors have a cross 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 individuals health. As a result of negotiations with the government Health Department identified 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 vehicle. GTG NZ held the majority of the remaining 67% of the acquisition as a majority shareholder. The details for each of the. Pathology labs is attached on Appendix One, Two and thrre As the finance manager, your task is to assess which of the potential acquisition targets was the most suitable for GTG Limited. For you to accomplish this task you will be required to adhere to the specific acquisition guidelines policies of GTG Limited in Geneva. You will be required to: 1. To determine the free cash flows from each of the potential acquisition targets (10 marks) 2. To evaluate the proposals. a. Calculate the net present value of the acquisitions based on the cash flow information provided, using the proposed acquisition value as provided in each case. 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 currently this is 5% plus a risk premium 2%. This will satisfy shareholders return in Geneva. (20 marks) 3. To finance the acquisitions a. The company wishes to fund the acquisition using a Bond issue. Assuming the bonds will be issued for 5 years with a coupon rate of 6.5%, and GTG New Zealand wishes to raise $1,000,000 determine the price and number of bonds to be issued given that the market rate for similar bonds is 8%.(20 marks) 4. Prepare a board report (1 page )the directors of GTG New Zealand and Geneva can review which highlights your recommendation based on your calculations. In addition, raise any concerns or aspects you may have other than quantitative analysis that may assist in the evaluation of the potential acquisition. Note only one of the acquisitions opportunities can be selected. (10 marks) 3 | P a g e APPENDIX 1 ACQUISITION PROPOSAL 1 NAME; AUCKLAND PATHOGY LOCATION; 2 Greenlane St, Auckland The initial discussions have been undertaken with the senior management and 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 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 is based on the 2020 data. FINANCIAL DATA Overall the company based on initial discussions has been performing well, however mark share is marginally 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 organisation PROPOSED ACQUISITION DETAILS From initial discussions the purchase price to be offered by GTG NZ Ltd is based on a multiple of 3 times average earnings of $450,000 over the last 3 years. Giving an acquisition price of $1,350,000. OTHER INFORMATION A well-established organisation with high revenues. Indications from the owners is that they intend to retire over the next three years. 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 Amortisation not included in Operating expenses$ 250,000.00 $ 225,000.00 $ 200,000.00 4 | P a g e APPENDIX 2 ACQUISITION PROPOSAL 2 NAME; REGIONAL PATHOLOGY (RP) LOCATION; Base hospital Palmerston 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 organisation 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 commercially favorable rent) the laboratory services the needs of the hospital and the local doctors in the region. The pathology lab benefits by having the use of much of the hospitals infrastructure and administration services. The industry is capital intensive in terms of the development of new technology and diagnostic equipment. Collection rooms. Note there are minimal number 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 10,000 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; 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 Amortisation not included in Operating Expenses $ 100,000.00 $ 80,000.00 $ 75,000.00 5 | P a g e 1. The tax rate is 30% for the organisation PROPOSED ACQUISITION DETAILS From initial discussions, the purchase price to be offered by GTG NZ was based on a multiple of 3 times earnings $275,000, giving an acquisition price of $825,000. OTHER INFORMATION 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 most of the tests, themselves eliminating the need for additional pathology staff.