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Hard Merger & Acquisition

Eye Can See Clearly Now

#Healthcare
ProHub Comment

This is a sophisticated healthcare M&A case that tests valuation, synergy identification, and deal structuring. The case cleverly reveals that the initial deal appears poor on a standalone basis (7% ROI < 13% WACC), but becomes attractive through operational improvements and revenue synergies. The critical tension involves managing physician incentives post-acquisition to prevent key talent erosion.

Estimated Time 36 minutes
Difficulty Hard
Source Wharton
10 / 100
Your client, a PE firm, is considering an investment in Dr Kelso’s Ophthalmology Practice, located outside Philadelphia. Dr. Kelso’s Practice is requesting $15M for a 50% stake in the business. Should they make the investment?

Clarifying Information

  1. What is ophthalmology? How does Dr. Kelso’s business make money? a. An ophthalmologist is an eye doctor b. Dr. Kelso’s practice provides a full range of ophthalmology services (exams, surgeries)
  2. What is the ownership structure today? a. Today, Dr. Kelso and 3 other doctor partners are equity owners in the business b. They are only paid their share of the profits. They do not take a salary
  3. What are the PE firm’s objectives? a. To make a good ROI on the investment
  4. Does the PE firm have similar investments? a. The firm has invested in other hospitals, but they do not offer ophthalmology as a service
Mock Interview
Interviewer

Your client, a PE firm, is considering an investment in Dr Kelso's Ophthalmology Practice, located outside Philadelphia. Dr. Kelso's Practice is requesting $15M for a 50% stake in the business. Should they make the investment?

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

A PE firm evaluates acquiring a 50% stake in a Philadelphia ophthalmology practice for $15M. Initial analysis shows poor returns, but revenue improvements (5% pricing/collections boost) and cost synergies ($1M reduction) create 60% ROI. However, the deal structure creates physician incentive misalignment that threatens volume growth, requiring careful compensation restructuring to retain value.

Key Insights:

  1. Valuation using perpetuity growth model: Value = FCF / (WACC - g); standalone valuation of $32M makes 50% stake worth $16M
  2. Deal thesis depends entirely on realizing synergies; without them, the 7% return is below WACC and unacceptable
  3. Critical deal risk: changing physician compensation from 100% profit-share to 50% profit-share plus partial payout destroys work incentives and threatens volume
  4. Sensitivity analysis is essential—a 10% revenue decline due to price increases eliminates value creation
  5. Effective solution requires performance-based compensation and phased payouts tied to volume maintenance to align physician and PE firm interests