Federal officials finally approved the merger of Cigna (NYSE:CI), one of the nation’s biggest health insurers, and pharmacy benefit manager Express Scripts Holding Co. (NASDAQ:ESRX) Cigna stock has been a strong performer in recent years, and this merger will make CI stock even more formidable.
One of the motivating factors behind this $52 billion deal was the desire to keep pace with Aetna (NYSE:AET), Cigna’s chief rival in the health insurance market. Aetna is planning to join forces with CVS Health (NYSE:CVS), the drugstore chain that competes with Express Scripts in most of the largest regional markets.
Why the Deal Was Approved
Legendary investor Carl Icahn had criticized the deal sharply, asserting that the acquisition of Express Scripts would not add much value to Cigna stock. But the shareholders of both companies approved the deal anyway.
A few more details have to be worked out with state regulators, but the merger is expected to close by the end of this year.
Most analysts had expected the deal to be approved by the federal government, since the two companies have few overlapping businesses, making concerns about monopoly pricing unlikely. Actually, the deal is a classic example of vertical integration: it’s a merger of two successful companies that serve the same customers but provide different services.
The Outlook for Healthcare and Cigna Stock
The future of the Affordable Care Act remains an open question. But with the Democrats likely to gain seats in the midterm elections and perhaps take control of one or both houses of Congress, the essential elements of the law seem likely to stay in effect.
If both the Cigna and Aetna deals close, the result will be considerably more synergy in the health insurance market, with greater sharing of information. The combination may also result in lower drug prices, which remains a hot political issue.
The major factor looming over the whole healthcare sector is the coming entry of Amazon (NASDAQ:AMZN) into the healthcare business. With its extensive marketing and database capabilities, the internet sales titan could change the whole industry’s rules.
That’s why Cigna was smart to shore up its inherent advantage, i.e. its knowledge of every aspect of its highly regulated and complex market, while it still has time to do so.
Cigna’s most recent earnings report, unveiled in early August, beat analysts’ expectations – and that’s before the benefits of the merger kick in.
Cigna stock has paid off nicely for its investors in the last six months, gaining more than 15% since the beginning of the year, even as many other insurers have been treading water or sinking.Despite all of the company’s recent good news and the advance of CI stock, Cigna stock is still below where it was in January, and the price-earnings ratio of CI stock stands at 19. That makes Cigna stock rather cheap, considering the health insurer’s growth potential.
