Your average retail investor doesn’t have much business trying to play a mergers and acquisitions standoff like that between Cigna (NYSE:CI) and Anthem (NYSE:ANTM) — leave that to the professional arbitrageurs — but that doesn’t mean they can’t benefit in a more modest way from the latest drama in the health insurance industry.
Mergers and acquisition activity tends to be good for stocks, especially those that find themselves in an industry undergoing rapid consolidation.
And if enough targets hold out for higher prices, the deals — and share-price premiums — will only get bigger.
CI is right to take advantage of the situation. At the rate the health insurance is consolidating, pretty soon there won’t be anyone left to play.
To back up a little bit, Anthem first started quietly talking to CI about an acquisition last year, but it has gone nowhere. Anthem is currently offering $47 billion for Cigna, but CI says it’s not enough. (It looks like the CEO of smaller Cigna doesn’t want to relinquish power, either.)
CI has a laundry list of objections to the deal, including a “lack of growth strategies,” a”massive” data breach at ANTM in February, and the proposed concentration of power in Anthem’s CEO. It clearly rankles CI that the Anthem CEO would find himself occupying four roles as a result of the acquisition: chairman, CEO, president and head of integration. As Cigna board said in a letter to Anthem’s board:
“Your proposal raises very serious questions regarding your views on proper governance, board oversight and risk management and underestimates the complexity of combining our organizations.”
CI Says “Show Me the Money”
But, c’mon, folks, let’s face it: The only complaint CI is truly serious about is its contention that the Anthem price of $184 per share isn’t enough. To quote from Cigna again;
“[The board] unanimously determined the proposal is inadequate and not in the best interests of Cigna’s shareholders.”
That’s code for “we want more.”
If you’re a shareholder in Anthem, this is a tiresome process, for sure, but it needs to be done. ANTM has little choice but to try and dance with CI as long as the M&A music is playing.
After all, big health insurers are looking to get bigger. It gives them more leverage in negotiations with providers, benefits managers and drug companies. Just as importantly, they gain more customers enrolled in private- and government-supported health plans. Heck, Cigna itself is currently trying to acquire Humana (NYSE:HUM).
ANTM shareholders can’t be thrilled with the potential price of the acquisition. When ANTM initially offered $175 per share, CI stock was trading around $138. And then, as we know, ANTM upped the offer to $184.
This is not to say you should sell if you hold either ANTM or CI stock. True, this particular deal may not go through — but you can be sure that others will.
A rising tide of mergers and acquisitions lifts all health insurer boats. The odds are good these days that there’s more market-beating upside in pretty much any big health-insurance stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
