Anthem-Cigna Merger Receives a Blow from Federal Judge

As anticipated, the merger between Anthem Inc. ANTM and Cigna Corp. CI saw the same fate as that of Aetna Inc. AET and Humana Inc. HUM which was blocked last month. The merger of Anthem with Cigna has also been blown away by a federal judge citing concerns that the deal would lead to higher prices and throttle competition in the health insurance industry.

The news however did not affect the stock of Cigna which dipped 0.04%, while that of Anthem was up 0.01%, as it was already anticipated and priced in.

Announced in mid-2015, and originally expected to close in the second half of 2016, the $48-billion, stock-and-cash deal, if finalized, would have united two major players in the health insurance industry and created one of the largest managed care companies in the U.S. Also, it would have enhanced Anthem's presence substantially in the rapidly growing Medicare market.

Since the announcement of the merger, shares of both Anthem and Cigna have underperformed the Zacks categorized Health Maintenance Organization industry by generating a return of 5.13% and 1.45%, respectively, compared with the sector's gain of 19.63%. The share price performance is reflective of the pessimism that surrounded the stocks over the merger-related uncertainty and investor perception that it may finally be blocked.

Regulator's Stance

Last July, California Insurance Commissioner Dave Jones questioned the viability of the deal. Jones contended that the mega deal worth $48 billion would curb competition and hurt the consumers in the state.

The merger would have lead to consolidation and caused greater concentration in the health insurance market in California which is already chockablock with players. According to Jones' office, in case the merger sees the light of day, the new Anthem would control more than 50% of the market in 28 of the state's counties and over 40% of the market in 38 counties.

This would mean more power in the hands of the company, which will gain in size and scale. It is feared that the company which already has a history of rejecting claims and insufficiently addressing consumer grievances, will bother even less to serve its customers, once it gains strength. It is also being contemplated that the insurer will have lesser incentive to improve the quality of its product and service, since there will be fewer and small players to compete against it. The company may also hike premium and increase out-of-pocket costs, which will pinch the pockets of customers.

Now, the deal has received a "no" from a federal judge who fears that the deal would cause irreparable damage to the industry.

Anthem now owes Cigna $1.8 billion in break up fees.

Now What?

Cigna and Anthem have been hoarding cash over the past one and a half years to fund the deal. They will now likely use the funds in sealing other deals, investing in business or repurchasing shares which was put on hold since the deal was announced.

Will Trump Save the Deal?

One possibility, though slightly remote, for Anthem and Cigna is that they could strike some accord with the new antitrust enforcement officials under Trump to save the merger. The antitrust enforcement under Barack Obama was aggressive and a number of mega mergers torpedoed under his presidency including those of Halliburton Co. HAL and Baker Hughes Inc., and Staples Inc. with Office Depot Inc.

Anthem carries a Zacks Rank #3 (Hold).

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Cigna Corporation (CI): Free Stock Analysis Report

Aetna Inc. (AET): Free Stock Analysis Report

Humana Inc. (HUM): Free Stock Analysis Report

Anthem, Inc. (ANTM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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