Obama Healthcare Driving More Major M&A

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It has been only 18 days since ADVFN published “The Obamacare Effect Starts U.S. Merger Frenzy” on 06 July, in which we reported that U.S.-based healthcare insurer, Aetna (NYSE:AET), announced that it would be acquiring all outstanding shares in Humana (NYSE:HUM).

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At that time,  the New York Times and others had forecasted that that acquisition would be merely the first ripple in what is going to be a major trend in U.S. healthcare. In particular, we noted that “Anthem (NYSE:ANTM) and Cigna (NYSE:CI) had each expressed their own interest in acquiring Humana. There is the potential that they might be in a congenial merger mode.”

Here we are, precisely three weeks to the day of  the official Aetna-Humana announcement, and, sure enough, the prophetic words have already become reality.

The companies made a joint announcement this morning that Anthem has agreed to acquire Cigna at $188 per share, for a total of $48 billion. With debt included, the deal is valued in excess of $54 billion, making it the largest deal ever in the U.S. healthcare insurance industry and the largest U.S. health insurer with more than 53 million insured patients. UnitedHealth Group (NYSE:UNH), currently the largest U.S. health insurer has yet to do anything overtly that would indicate that it plans to make any acquisitions. Thus, once the Anthem/Cigna and Aetna/Humana deals are completed, barring any other changes, the five largest U.S. healthcare providers will become the three largest.

Cigna shares closed at 154.36 on Thursday, down from 160.99, making the Anthem offer a premium of 21.8% as of yesterday. Cigna’s share price has declined by an additional 4.3% to 147.91 as of 11:00 EDT. Shares of Anthem have also declined this morning by 2.6% to 151.13.

The only reason that I can legitimately ascribed to both shares prices being in decline has nothing to do with the stock market. It is, rather, my guess that the investor response has to do with the entrenched practice of Americans stretching their summer vacations by adding a Friday to the front end of their time at the beach. Evidence of this may be reflected in the relative indifference in the number of shares traded.

The response to the Aetna/Humana deal was more dynamic because the announcement, as I recall was made on 03 July, also a Friday, but a Friday when the U.S. markets were closed. Therefore, because the announcement was released on a holiday, the market response was delay until the following Monday.

Although legitimate concerns have been raised on potential violation of antitrust regulations, Anthem CEO Joseph Swedish said that he is confident that, “no substantive antitrust or insurance regulatory issues are present that would prevent completion of the transaction.”

Mr. Swedish told reporters that the deal “could generate nearly $2 billion in synergies.” The Dow Jones News seemed to think that Swedish was talking about cost-savings. Now, I don’t know if it is my position to correct the DJN, but I do believe that our readers deserve clarity wherever possible.

Given the context of his comments, in which he also said that those synergies would “have the scale to drive greater efficiency and affordability for our customers,” and the meaning of the word itself, it is much fairer to say that Swedish was talking about the effect of combining the unique strengths of both companies into one.

Speaking to the broader healthcare M&A trend, “Insurers are under pressure to plunge more of their premium payments into care, as required by the Affordable Care Act, which overhauled the industry and requires individuals to have insurance. That gives them an incentive to get bigger because they can spread out administrative costs among a larger base of patients.” Therefore, we may expect the trend to continue for the next several years.

The Anthem/Cigna acquisition is not expected to close until 2H 2016.

Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net

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