MBA 2nd Sem, F-506: Healthineers Strategic IPO Report

This report presents a comprehensive analysis of the Healthineers IPO, a subsidiary of Siemens AG, examining its strategic rationale, financial performance, and valuation. The analysis includes an overview of the healthcare industry, Healthineers' competitive position, and the implications of Siemens' Vision 2020 strategy. The report delves into relative valuation, comparing Healthineers to its peers using various multiples, and employs discounted cash flow (DCF) analysis to estimate the company's intrinsic value. It also explores a residual income model to assess the investment potential. The study scrutinizes the valuations provided by financial institutions, offering alternative scenarios and concluding with a recommendation against purchasing Healthineers shares at the IPO price based on the available information. The report emphasizes the importance of critical analysis and informed decision-making in the context of the IPO.

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A Report on
“Healthineers: A Strategic IPO”
F-506: Cases in Financial Decision Making
Submitted to:
Dr. Gazi Mohammad Hasan Jamil
Associate Professor
Department of Finance
University of Dhaka
Submitted By
Group-14
ID No. Name Remarks
21-910 Nazmun Nahar Nilima
21-912 Jannatul Ferdous

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21-949 Saif Mahmud
Date of Submission: 27 th February 2020

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Letter of Transmittal
27th February 2020
Dr. Gazi Mohammad Hasan Jamil
Associate Professor, Department of Finance, University of Dhaka.
Subject: Submission of report on “Healthineers: A Strategic IPO”.
Dear Sir,
We are pleased to present the report that you asked for as a part of our MBA, 2st
semester, and course F-506: Cases in Financial Decision Making. We are thankful to
you for giving us such an amazing opportunity to work on the topic “Healthineers: A
Strategic IPO”. We are privileged to work on such a topic where we could apply our
theoretical knowledge in understanding the real problem.
We have put our sincere effort to give this report a presentable shape and make it as
precise as possible. We cordially thank you for providing us with this unique
opportunity.
Sincerely yours,
Nazmun Nahar Nilima
ID: 21-910
On behalf of,
Group-04, MBA 21st Batch, Section
A Department of Finance
University of Dhaka

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Acknowledgment
At first, we would like to express our gratitude to the Almighty Allah for giving us such
strength and opportunity to complete the report within the scheduled time.
Suggestions and assistance from many individuals and experts supported us a lot in
every step of the report. It is our immense pleasure now to acknowledge them with
gratitude.
After the Almighty, we would like to express our sincere gratitude to our honorable
course teacher, Dr. Gazi Mohammad Hasan Jamil, Associate Professor of Finance
Department, University of Dhaka for his continuous support and guidance throughout
the course. His constant presence and words encouraged us a lot to complete the
assigned report. It would probably be impossible to complete this report without his
guidance and availability.
Finally, we are grateful to all of our group members. Without their earnest effort, we
couldn't complete the report.
This report is prepared for meeting our academic purpose, not for any other reason.
It might not be used for the benefit of any other purpose.

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Executive Summary
This report analyzes the case ‘Healthineers: A Strategic IPO’ which describes how
Healthineers, a subsidiary of Siemens AG, is about to go public. Healthineers is a part of
the healthcare industry which is dominated by players like General Electric, Philips,
Abbott and Roche. This industry offers great potential to a newly introduced company as
well as the possibility of being wiped away. The IPO is an important event for
Healthineers because it believes being separated from its parent company allow
entrepreneurial spirit to bloom and grant necessary autonomy. Its parent company, Siemens
AG, is currently proceeding according to its Vision 2020 strategy. But the vales established
by the said strategy does not seem to be working as healthcare industry proves to be
different than all other industries Siemens AG is currently operating in. So it is easy to see
why the management would be motivated to separate Healthineers from Siemens AG
(although Siemens AG would retain majority of the ownership). In addition, the stocks
could be used to purchase small start-ups which none of the valuations accounted for.
In light of this, Healthineers has appointed Deutsche Bank, Goldman Sachs and JP
Morgan Chase and Co. as the joint coordinators with support from financial institutions
such as BNP Paribas, Bank of America, Citi Group and UBS Investment Bank. They have
provided 3 valuations based on multiples and expected cash flows, all of which are
around €34 per share. As analysts and learners, it is our duty to question the analyses
provided.
In light of this, we have divided the report into 4 parts. The first part contains the company
overview, company analysis, industry analysis, extent of competition, Porter’s 5 Forces
model and many more. This has helped us prepare the investment thesis in the later part.
This part also talks about the Vision 2020 strategy and its impact. After reading this part,
an investor should have sufficient knowledge regarding the healthcare industry, its players
and most importantly, Healthineers.
The first part analyzes the relative valuation analysis. We have scrutinized the multiples in

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order to determine if the values are consistent with the reality. We have calculated the
enterprise value and the equity value of Healthineers using different multiples. Enterprise
value and equity value have been calculated by taking different multiples of different peer
groups. We have also calculated the same values by using sum-of-the-parts valuation
taking different comparable companies into the consideration. After taking all peers under
consideration, we believe that the reasonable estimated equity value per share is €29.34
on an average. And at the same time, reasonable estimated enterprise value of Healthineers
is €35784 on an average.
The third part of this report is about the discounted cash flow analysis. The DCF model
provided by Deutsche Bank suggests the value to be €34.18 per share. We assumed
optimistic and pessimistic positions by changing the variables and their values given by
Deutsche Bank. This helped us realize that this model is too much speculative. Because
just 1% change in the values produce a value per share that is around 50% lower than the
base case in the pessimistic scenario and around 100% higher than the base case in the
optimistic scenario. In addition, there were other problems such as difference in valuation
dates, not considering floatation costs etc. These led us to seek for alternatives. So, we
developed a residual earnings model that reduces the extent of speculation tremendously.
Based on this model, we suggest not to buy shares of Healthineers on 20th April, 2018
because we believe it is overvalued. We believe this because we could not find any
information that would brighten the future outlook of Healthineers. Only if Healthineers
can prove that it will be able to increase its profit margin or increase its market share in the
Diagnostics segment, the investors are suggested to buy shares of Healthineers.
The next part answers the questions presented in the Appendix 1 of the case. Some of
the question have already been answered in the earlier parts. We believe these questions
capture the theme of the case perfectly which is to scrutinize or question and sharpen our
analytic skills.
So what value do we suggest? None. Because of the limited information, it is impossible
to declare a value of Healthineers with certainty. In fact, it is not our duty to stick to one
value.

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This is why we have procured so many different scenarios with different values. It is the
responsibility of the investor to choose the scenario and make informed decision. This
case, in fact, is not about procuring a value, rather scrutinizing the given values.

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Contents
Letter of Transmittal......................................................................................................ii
Acknowledgment....................................................................................................iii
Executive Summary............................................................................................................iv
Chapter-01.......................................................................................................................... 1
1.1 Origin of the Report.......................................................................................................2
1.2 Objective of the Report..................................................................................................2
1.3 Scope of the Report.......................................................................................................2
1.4 Methodology..................................................................................................................2
1.5 Limitations of the Report..........................................................................................3
Chapter-2............................................................................................................................ 4
Chapter-3............................................................................................................................ 6
3.1 PESTEL Analysis:........................................................................................7
3.2 Porters 5 Forces Model................................................................................8
3.3 HHI Index....................................................................................................10
Chapter 4.......................................................................................................................... 11
4.1 Company Overview................................................................................................... 12
4.2 Vision 2020 of Healthineers......................................................................................12
4.3 Financial Analysis of Healthineers...........................................................................12
4.4 Internal Analysis of Healthineers.............................................................13
Chapter 5.......................................................................................................................... 16
5.1 Relative Valuation....................................................................................................17
5.1.1 Valuation in Comparison with Peer......................................................17
5.1.2 Sum-of-the-parts Valuation...................................................................20
5.2 Discounted Cash Flow.......................................................................................22
5.2.1 Base Case.....................................................................................................................24
5.2.2 Optimistic Case (Variation of 0.5%)......................................................................27
5.2.3 Optimistic Case (Variation of 1%).........................................................................28
5.3.5 Pessimistic Case (1% of Variation)......................................................................31
5.2.6 Interpretation.......................................................................................................32
5.2.7 Acquisition of Start-ups: The Missing Link.........................................................33

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5. 3 Residual Income.....................................................................................................34
5.3.1 Why Residual Income Model?..................................................................................34
5.3.2 Our Suggestion: Don’t Buy.......................................................................................37
5.3.3 When to Buy............................................................................................................ 38
Chapter-6..........................................................................................................................41
References........................................................................................................................43

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Chapter-01
Introduction

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1.1 Origin of the Report
According to the requirement of the course F-506: Cases in Financial Decision
Making, a report is to submit on the assigned case topic under the M.B.A. Program of
the Department of Finance. The topic of the report is “ Case analysis on
Healthineers: A strategic IPO” and we have been designated to do the report as per
the instructions of our respected course instructor Gazi Mohammad Hasan Jamil,
Associate Professor, Department of Finance, University of Dhaka.
1.2 Objective of the Report
Usually we gather theoretical knowledge from course material. But it is also very
much important to relate that theoretical knowledge with practical situation. The
basic objective of conducting this case analysis is applying our theoretical
knowledge in practical situation. The objective behind conducting this study is as
follows:
 To analyze the IPO strategy of Healthineers.
 To analyze the pre-IPO price and post IPO price to check it reliability.
 Analyze different alternatives that could add value to the company.
1.3 Scope of the Report
The study topic allows us to analyze the cases named “Healthineers: A Strategic
IPO”. We have gone through the case thoroughly, analyzed the problems of this
company and tried to find out solutions of these problems. Finally we have reached
recommendations that will help to take the decision. Some external information has
been used for lack of information provided.
1.4 Methodology
For preparing our report we went through the text and information collected from
case and applied our sense of finance which we gained from different course
especially from corporate finance and capital budgeting to evaluate and justify our
assigned topic. All the data used in this report have been gathered from the case.
Financial techniques taught in our BBA and MBA courses have been used here.
Some reasonable

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assumptions have been made because of lack of information provided. To analyze
and solving the problem Free cash flow method, Crystal ball software is to
complete the simulation analysis.
1.5 Limitations of the Report
The limitations of the study are defined by the extensive of the facts covered by the
study and those that left out. Learning all functions, moods of business, risk factors
and protective covenants were quite tough within specified time framework. There
was also time constraint. While attempting to solve the problem we have to assume
some factors. The analysis could have been better if those data were provided.