The two division of Humana – Health Plan and Hospitals – are growing increasingly divergent with the passage of time. Although the company has not fallen into any trouble, there are clear signs that the company’s performance is deteriorating. The company has suffered has received some negative publicity and conflicts of interests regarding the inter-company transaction between the two business segments. The company has identified some potent alternatives to address its problems. It is believed that the spin off option is the most effective of those options. The company’s business segments have been independently valued using the multiples as well as the discounted value approach. It is believed that the spinoff would add considerable value to the company. It is, therefore, recommended that the company proceeds with the spin-off option.
1. How is Humana’s business doing? How their recent performance is compared to that of the industry? Do you think Humana’s problems are serious enough to warrant some form of restructuring?
2. What corporate structure would you recommend for Humana?
3. Why would Humana benefit from engaging in a spin-off? Explain.
4. How much value do you estimate the spinoff would create for Humana? What are thesources of this additional value, and how should the spin-off be structured for Humana to realize maximum benefits from the restructuring?
5. Why has an integrated strategy apparently worked for Kaiser Permanente but not worked for Humana?
6. Do any of the other options considered by management represent a more sensible solution to Humana’s problems than the spin-off?
Comparison to Industry
Performance Trends of Humana
Valuation Based on Multiples
Valuation Based on EBITDA Multiple
Valuation Based on P/E Multiple
|Discounted Cash Flow Analysis|
Discounted Cash Flow Analysis
Discount Rate Calculation
Cost of Equity:Cost of Debt
Calculating Cash Flows (US $ Millions)
Free Cash Flow to Firm
Calculating Values of Humana's Business Segments
FCFF for Hospital
Terminal Growth Rate
Value of Hospital Segment
Value of HMO Segment
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