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The wounded shark and its suitors


Caught in the red ocean trap, Fortis Healthcare’s journey teaches us three key lessons

Once, there was a big blue ocean; home to many sea creatures big and small. The ocean, with all its immensity and magnificence was a thriving ground for every marine life. There were several aquatic kingdoms that dwelled and flourished in the deep blue. Amongst them, was the prosperous empire of the great shark. His province known to be teeming with riveting flora and fauna was a place that everyone wanted to be. The illustrious shark, was popular for his knack for smart warfare. Many appreciated his greatness but also feared his warfare. He was also acclaimed to be excellent in striking partnerships that helped him to expand his dominion far and wide. Over the years, the glory that the shark attained made him so self-absorbed and proud that he slowly began to ignore his people and province.

What is the Red ocean strategy?

The Red Ocean is where every industry is today. There is a defined market, defined competitors and a typical way to run a business in any specific industry. The researchers called this the Red Ocean, analogous to a shark infested ocean where the sharks are fighting each other for the same prey. A Red Ocean Strategy aims to fight and beat the competition. Red Ocean Strategies have the following common characteristics:

  • They focus on competing in a marketplace which already exists.
  • They focus on beating the competition.
  • They focus on the value/ cost trade-off. The value/ cost trade-off is the view that a company has the choice between creating more value for customers but at a higher cost, or reasonable value for customers at a lower cost. In contrast, those who attempt a blue ocean strategy aim to achieve differentiation and at the same time, low cost.
  • They focus on exploiting existing demand.
  • They focus on execution (better marketing, lower cost base etc).

A Red Ocean Strategy ultimately leads an organisation to follow one of two strategies – differentiation or low cost. Whichever is chosen the organisation must align all activities with one of these strategic directions.

One unfortunate day, a ferocious storm hit the the ocean. The storm was so mighty that it wiped out many kingdoms. The situation in the deep blue worsened when a huge war broke out. Every creature big and small fought for its survival. The great shark fought fiercely to save his realm, but to his dismay, everything was lost. Everything that was built in several years came crashing down, the beautiful empire was tarnished. He was left wounded and now, he would soon become prey to the hungry sea creatures that loomed around his territory as they have smelt blood.

The shark tries to swim to the other end where he will find help. But the sea is still rough… What will the great shark do to save himself? Will he manage to tide over to the other end and find help? Or will he be hunted by the deadly creatures that await him?

Wondering why was this fairy tale narrated here?

Well, if you look at the story closely, this situation is similar to the circumstances that occurs in a red ocean trap amongst several business industries. The Indian healthcare sector is currently experiencing an identical phenomenon. A careful analysis will show that the sector is slowly brewing a red ocean trap wherein many players are falling prey to a highly competitive environment and balancing sustainability with profitability is becoming a tall task. Reasons being, a defined market but fragmented players, increased competitiveness, growing government intervention to regulate the industry, capital intensive nature of markets, rising patient demand, lack of innovation and creative direction and so on. The extreme difficult conditions that most players operate today only leads to deteriorating corporate performance. One such case in point is the situation that Fortis Healthcare landed in today.

The Fortis Healthcare saga: The rise and fall in 10 years

Once a distinguished player, Fortis Healthcare’s rise and fall has been known to all. After the Singh Brothers sold their stakes of Ranbaxy, (the pharmaceutical business of the Fortis Healthcare group) to Daiichi Sankyo in 2008 (the deal was valued at $2.23 billion), the company suddenly captured global attention. Overnight, the Singh brothers became celebrities of the Indian business world.

A year before the deal, Ranbaxy was faced with strictures from the US FDA. Despite, the merger with Daiichi, Ranbaxy’s trails and tribulation continued to multiple. After the long-term FDA ban on exports of their medical products, the company was in deep jeopardy. Their corporate performance went for a toss. The company’s woes added when the Singh Brother got embroiled in a legal tangle with Daiichi. The Singh Brothers were also said to have disappeared around Rs 10,000 crore. However, their hospital business was a saving grace. A year after the Daiichi deal, Fortis Healthcare had acquired 10 hospitals from Wockhardt whose corporate performance was experiencing a tailspin at that time. The acquisition of Wockhardt Hospital was one of the largest deals then. Later, the company tried to bid for the Singapore-based Parkway Pantai group of hospitals but was unsuccessful.

The suitor’s offer for Fortis Healthcare

To begin with, Malaysian hospital chain IHH claimed that its revised proposal is based on its assessment that FHL needed Rs 4,000 crore to meet immediate liquidity requirements and to fund the buyout of Religare Health Trust (RHT) assets. With that in mind, IHH proposed a binding offer for an immediate infusion of Rs 650 crore – without any due diligence – valuing Fortis at Rs 160 per share. This amount was to be applied primarily to pay employees, creditors and ease FHL’s debt servicing needs. In exchange, IHH wanted the right to appoint two directors on the FHL board. “We expect the independent directors of the company to constitute a majority of the board after the appointment of our nominees,” said the offer letter.

It also stated that the offer was subject to confirmation that it will be given “immediate access to carry out a legal and financial due diligence.” IHH also made a non-binding proposal to infuse up to Rs 3,350 crore subsequently, subject to satisfactory completion of the due diligence exercise in a three-week time frame.

The Malaysian hospital chain further stated that the revised proposal had to be accepted in its entirety and set a deadline of 5 pm on May 4 before the revised offer would be withdrawn. This, incidentally, is the third offer that it has made to FHL in 10 days.

Meanwhile, the offer letter from KKR-backed Radiant Life Care proposed a binding offer to purchase the Fortis hospital in Mulund, Mumbai, “without due diligence and as a going concern at an enterprise valuation of Rs 1,200 crore as the first step.”

This followed the company acknowledgment that “due to liquidity constraints, FHL has been unable to run a formal auction process” and was only considering binding offers. The second part of Radiant’s offer – non-binding at this stage and subject to due diligence – proposed spinning off SRL Diagnostics “for the time being so that FHL can run an independent competitive sale process.”

Radiant further proposed a demerger of the hospitals business from FHL into a new company followed by an all-cash open offer to shareholders of the new entity at a price of Rs 126 per share. The offer is subject to Radiant being able to acquire 26 per cent or more shares of the new company. “In order to fund RHT stake acquisition, we propose a rights issue offer by NewCo [new entity]. The entire rights offer amount would be back-stopped by Radiant,” the offer letter added.

That brings us to the last revised offer on the table for FHL as of April 24. MHEPL, revising its offer for a second time in two weeks, has now proposed to offer a premium of Rs 1,319 crore to FHL shareholders, over and above the equity valuation for FHL’s hospital business of Rs 5,003 crore. This is a hike of 25 per cent over its previous revised offer dated April 10. Under the fresh offer, an equity value of Rs 6,322 crore will be attributed to the hospital business, up from Rs 6,061 previously.

Manipal also offered to buy up to 5 per cent of the paid-up capital of SRL from Fortis at the same price as it will buy from private equity investors of SRL. It will buy the stake from private equity investors of SRL for Rs 11,134 crore, added the offer letter. In return, it has sought control over at least 51 per cent of voting rights in SRL along with Fortis and also majority representation on SRL’s board. It has also sought limited veto rights pertaining to certain matters of SRL.

Moreover, MHEPL offered to “arrange financial assistance of up to Rs 750 crore”either by way of debt financing of by way of guarantees or comfort letters to lenders of FHL to take care of immediate liquidity. But this is subject to applicable laws and FHL approving the new proposal.

MHEPL also said that it did not have any objection to the merger of Fortis and SRL subsequently provided all pending investigations into Fortis and other entities were completed without any adverse implications, including any reputational damage.

Source: Fortis Healthcare

The company further continued their efforts to get more healthcare chains under their fold, but couldn’t succeed. Later, Fortis’s global operations were merged into Fortis Healthcare and their number hospitals stood at 78 with a cumulative total of 12,000 beds, 580 primary health centres, 188 day care speciality medical centres and 190 diagnostic laboratories. For a short while, they were the largest healthcare provider in the Asia-pacific region. Alas! They couldn’t maintain this glory for long.

The company’s dynamic healthcare leaders that cradled the hospital business for so long also could not stop the downslide. They had to withdraw from the international operations. In order to improve their balance sheet, they came up with Religare Healthcare trust. However, sometime later, news broke out that the Singh Brothers had deployed Rs 473 crore from the healthcare business into their own business which raised a red flag. This mystery still remains moot.

There are also contemplations about Fortis Healthcare going the Satyam way. After Fortis admitted that it had lent around Rs 470 crore to some companies as of December 2017 and that these companies had now become part of the promoter group two proxy advisory firms – Ingovern and Institutional Investor Advisory Services release reports that showed similarities in the Fortis and Satyam case. The Ingovern report mentioned, “The issue of transferring funds to a wholly-owned subsidiary, which in turn lends to promoter entities in order to skirt the shareholder approval requirement, seems to be a blatant fraud. Much like the Satyam case, the cash and cash equivalents on the books of the company seem to be non-existent. The company’s subsidiary has conveniently given loans to related parties without seeking shareholder approval and regulatory filings.” Sebi has instituted an investigation on the same as well.

The legal tangles based on fraud, malpractices and financial scam continues to haunt the business performance. The only resort left with the company is to merge their healthcare business (hospitals and diagnostic chain) with a responsible, well performing player and win back its glory. But how will they do this swiftly?

A lease of life or a road to destruction?

Fortunately, there are suitors who still find Fortis Healthcare as an attractive business acquisition.  There have been several business proposals for buying stakes in Fortis. The highest bidders being: Manipal- TPG, IHH group and Burman- Munjals. (Refer to the box: The suitor’s offer for Fortis Healthcare)

Will merger with any one of these groups be a fruitful move for Fortis? How will this deal impact the suitor who wins this bid? Is buying a distressed asset such as Fortis, a wise decision for the investors? How will this merger impact the industry at large?

Industry analysts and leaders from the healthcare sector feel that a merger with Manipal will be a good move for Fortis.  Says,  Amit Mookim, General Manager, South Asia, IQVIA, “The deal between both companies that combines complementary footprints of the two chains in north and south India is strategic. Combination of Manipal Hospitals and Fortis Hospitals will result in the creation of the largest provider of healthcare services in India by revenue with 41 hospitals in India and four hospitals overseas and an installed bed capacity of over 11,000 (including teaching hospital beds of Manipal Hospitals). The deal will create a large hospital entity across India which could look at additional acquisitions going forward. It may also lead to additional consolidation among organised players in the hospital space. ”

Farhan Petiwala, Executive Director and Head Development – India & South Asia, Akhand Jyoti Eye Hospital (AJEH) also feels that a merger with Manipal will give birth to India’s largest chain and with the strong reputation that Manipal pocesses, Fortis will be able to revive its glory once again.

Moreover, Manipal Group also seems to be upbeat of this deal but is unable to comment much at present. (Read interview with Rajesh Moorti,Group CFO, Manipal Education and Medical Group (MEMG).

While there are some who are positive on its merger move, some industry experts raise a red flag. “Fortis doesn’t have a great reputation for good corporate governance – and there are likely to still be skeletons in their cupboard which will come tumbling out . This will delay the deal”, opines Dr Aniruddha Malpani,Angel Investor. Malpani Ventures.

While speaking on the impact on the industry and patients, Dr Malpani adds, “ My worry is that while bigger is better for VCs, this is not always true for patients or doctors. These large hospitals become quite impersonal and get bogged down by bureaucracy. They often employ more administrators than clinical staff, and patients get low priority in their scheme of things, because they put profit before patients”. Petiwala also shares a similar concern for patients. He says that corporatisation of healthcare usually leads to increase cost of healthcare which patients have to bear. However, if the group conceives its expansion and growth plans keeping patients in mind, this can be a game changing move for the sector.

Well, the Fortis’s story doesn’t end here. While the entire industry is eagerly waiting to know who would win the bid, the board at Fortis Healthcare is witnessing a hive of activities. Changes in some board of directors, renewal of bids and  more. The evaluation process  continues and the wait for the bidder still on.

What can we learn from this episode?

Learning lessons

Fortis Healthcare story teaches us some significant lessons. In times when the industry is experiencing a dramatic change, it is significant that companies do not get trapped in the complications of the red ocean. It is imperative to be more creative in developing and executing competitive strategies, create niche segments, market spaces which can act as differentiators. Mentioned below are three key learnings:

Strategic planning for consolidations, partnerships and growth: Consolidations, merger and partnerships will be the name of the game in future. Informs Suresh Satyamurthy, CEO and Co-Founder, Tarnea Technologies Solutions, “There are numerous hospitals which are up for sale. As we speak, just in the hospital segment there is even a dedicated website which is offering hospitals for sale – https://www.hospitalforsalelease.com/. A very sure sign that a major consolidation is already underway. The same goes for the Diagnostic Services. The high capex and technology for diagnostics at large scale, has changed the business. Now collections are localised, the analyses are done centrally in a few chosen locations for the entire country, and the results are disseminated via email ! This sector too is undergoing rapid consolidation.”

While Satyamurthy speaks of the rise in consolidations, Jose Punnoose, Independent Director, CEO & Mentor: Hospitals & Health Systems speaks on the pros and cons of  consolidations in a highly competitive market. “Consolidation in terms of mergers can give access to geographies and market to which one may not have access to. The flip side of this coin is the possibility of lack of synergies due to conflict in mission, vision , values . Diversity in geographies, culture and practices are known to have had catastrophic results . Being too large also effects control , with inefficiencies creeping in into systems and processes . HCA in the US is a classic example which had to downsize after facing such a situation . The solution is to find the right balance. Consolidation will also mean synergising and finding the fit and not just adding assets. It could also mean downsizing and offloading non core businesses . Achieving financial strength, reducing clinical variation, increasing scale, and forming clinically integrated networks for improved care delivery are major considerations in various forms of consolidation, which ultimately should result in better returns for all stakeholders including patients.”

Mookim explains the prerequisites, “Companies going for consolidation should have a sound strategy and a clear communication plan to articulate the same to its shareholders. Early and transparent guidance to investors is also one of the key requirements to have long term benefits. Further, companies should be prepared to transition smoothly to the new requirements. They should be able to scale a sustainable business with robust corporate governance and systems and processes.”

Create new market spaces: Experts opine that payoffs of market creations are immense. Today the start-up community in healthcare is constantly in search of new areas to build business models that can make competition irrelevant. That can be an excellent strategy to go forward. This is a strategy suggested by W Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD and authors of The New York Times Bestseller Blue Ocean Shift and the global bestseller Blue Ocean Strategy. According to their concept, Blue Ocean Strategy generally refers to the creation by a company of a new, uncontested market space that makes competitors irrelevant and that creates new consumer value often while decreasing costs. This can be a good way to do business in healthcare. Referring to a perfect example of the same,  Satyamurthy expounds, “If you look deeply, the Indian system of specialisation has done better at exploiting economies of scale. Who can do the cheapest eye operations in the world? Its Arvind Eye Hospitals ! They even produce the cheapest intraocular lens in the world. They have dramatically changed the economics of eye surgeries on the strength of their specialisation. Likewise, we have specialised chains for – Diabetes – MV Diabetes, HCG for oncology etc. Each does one specialised service, but at huge scale! Their unit economics work well, and they are profitable. And none of them are looking to become a DGH (hopefully!) Rather than pursue consolidation to create a bigger entities what might have a greater impact on access and affordability is a drive towards specialisation of a therapeutic area, and building scale only in those specialisation.”

Interview with Rajesh Moorti,Group CFO, Manipal Education and Medical Group (MEMG)

Fortis has 2x the number of beds and 2x revenue compared to Manipal. There is also significant brownfield expansion for Fortis in key markets. Are these project apart of the deal?

This transaction encompasses all the assets of the hospitals business. MHE has spent significantly higher amount on new projects (both brownfield and greenfield) in the last three to four years.

What is Manipal Hospital’s vision on this merger? What is the strategy that they will adopt to increase its market share?

This is a compelling strategic fit with complementary geographic presence and clinical strengths. The combined entity will also have very good market share in a number of clinical services. This can be further leveraged through shared commitment to provide excellent patient care.

Will they look for further expansion?

A significant increase in demand for quality healthcare provides great expansion opportunities. This platform will be well suited to exploit these both in new geographies and existing ones. We will have to ensure that we fully utilise the new infrastructure created in the recent past first, before embarking on further expansion.

Manipal Group had a strong educational background in Southern India. How will they transform Fortis Hospitals into centres of excellence? What positive impact will this deal create within the Indian sector?

The combined entity will be the largest hospital service provider in India by revenue and will have talented staff of 4,200+ doctors and 9,300+ nurses. The hospital industry has been impacted by lack of availability of quality doctors and clinicians, a large pan-India network can provide great career opportunity for many. Both Manipal and Fortis are strong brands and Manipal is backed by over 65+ years of heritage. A strong focus on ethical clinical practices and excellent patient care can be true differentiators in the market.

Strengthen business values and revamp mental models: The Fortis Healthcare’s rise and fall is mainly attributed to the lack of strong business values that make a business empire attain brand equity and goodwill. Strengthening values of integrity, accountability, flexibility and innovation are paramount for any organisation to be successful in their business.

According to experts, it is important to build a culture that inculcates an ethical value system, only then can a healthcare organsation achieve excellence in service delivery and corporate performance.

What happens next…

Moving forward, we are certain that the final outcomes of Fortis Healthcare’s merger and acquisition will be out soon. We only hope that whoever wins the bid, would in future crack the code for Fortis’s distressed assets and not be sucked into the spiral of debt, misfortune and malpractice. Hope, that this move will be a new beginning for Fortis and that this new beginning will lead the company on the path to building a responsible and sustainable healthcare business empire.

Stay tuned to catch more updates on the Fortis deal on our website (http://www.expressbpd.com/healthcare/)


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