CVS Aims to Buy Aetna for $69B: Why The Two Health Giants Want to Merge

One of the biggest drugstore chains in the U.S. and an insurance giant want to transform American healthcare.

CVS announced over the weekend that it plans to purchase health insurance company Aetna for approximately $69 billion in cash.

It may seem like an odd combination–why would a company better known for selling aspirin, heating pads and holiday candy buy a company that insures millions of consumers for their most important healthcare needs?

Both companies are making a bet on the way health care will be delivered in the future, experts say, with a focus on one-stop shops in local communities offering a range of health and wellness services from walk-in clinics to filling prescriptions.

“We think of it as creating a new front door to healthcare in America,” Larry J. Merlo, the CEO of  CVS Health told the New York Times on Sunday. The deal must first be approved by regulators.

Trouble in the healthcare market

When it comes to health care, there are a lot of uncertainties these days.

The Senate version of the tax bill that Congress is working on currently includes measures that would get rid of the individual mandate–one of the key pillars of the Affordable Care Act–which requires all U.S. adults to purchase health insurance or pay a penalty. Without it, experts expect significant disruption in the healthcare market.

One outcome, however, is that health insurance companies could have more flexibility to offer different kinds of coverage than is currently allowed. Both companies that insure employees and individual consumers are struggling to contain the soaring cost of healthcare premiums and pharmacy benefits.

Aetna and CVS say they’ll be able to offer low-cost care through the chain’s many locations, via apps and the phone, according to reports.

Interesting to note: CVS and Aetna are acting defensively, as the healthcare market gets more competitive and new entrants make a play for products and services. Online retail giant Amazon, for example, is said to be in talks about entering the pharmacy business.

Aetna and CVS: By the numbers

  • Aetna is one of the nation’s largest health insurers, with 22 million members and annual revenue of $63 billion according to the Wall Street Journal.
  • CVS is one of the largest pharmacy and pharmacy benefits management companies in the U.S., with 10,000 store locations and 1,100 walk-in clinics, and $178 billion in annual revenue. In 2016, CVS filled 2.4 billion subscriptions, according to the company.

What happens when one company purchases another?

As we explained in this recent article, about publisher Meredith Corp. purchasing Time Inc., when one company purchases another, it often buys that company’s shares at a premium. That means at a value above the current trading price of the acquisition company’s shares.

In this case, CVS will pay a 29% premium for Aetna, according to reports.

As is often the case, news of mergers affects stock price. The stock prices of both Aetna and CVS fell about 2 percent as of early afternoon Monday.

Vertical mergers vs. horizontal mergers

Not all healthcare mergers have been successful.

Previously Aetna had tried to merge with insurer Humana. This was blocked earlier this year by a federal judge, over fears the combined companies would have monopoly control of the healthcare market. Similarly, a judge blocked a proposed merger between insurers Anthem and Cigna, this summer.

These combinations would have been what analysts call horizontal mergers, which is when companies in the same or very similar businesses agree to merge. There is frequently a fear of monopolies when this happens.

By contrast, the deal between CVS and Aetna would be known as a vertical merger, because the companies operate in distinct, albeit overlapping, industries. This merger would potentially have fewer monopoly implications.

Top Takeaways:

  • Drugstore and pharmacy benefits management company CVS made a bid to acquire health insurer Aetna for approximately $69 billion.
  • The merged companies are taking a bet on a new direction for healthcare.
  • The new direction includes more one-stop shopping for benefits, and access through retail branches and wellness centers.





Author:
Jeremy Quittner is the financial writer for Stash.



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