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Aetna to Acquire Humana in $37 Billion Deal

​Two major health insurance companies are moving forward in merger talks. Hartford, CT-based Aetna and Louisville, KY-based Humana began the merger talks back in July of 2015.

According to businesswire.com, Aetna seeks to acquire Humana’s growing Medicare Advantage business. Another article from Forbes states that one and three people in the United States purchase additional coverage through a Medicare Advantage plan. The total number of people purchasing an advantage plan in the United States equals 17 million. Furthermore, the Forbes article alludes to the fact that the Aetna-Humana merger could potentially dominate 1,000 markets. The new Aetna-Humana will center all of its TRICARE, Medicaid and Medicare business in Louisville.

The two companies structured an attractive deal. Aetna is the larger of the two companies, and in its bid to acquire Humana, Aetna will buy all outstanding shares from Humana shareholders in a cash and stock transaction. The price for the buyout is based on the closing price of the stocks on July 2, 2015 when merger talks began.

According to Yahoo Finance, Humana and Aetna stocks closed at $187 and $125 respectively on the same day in July. Aetna will buy the shares at a premium amounting to $230 per Humana share according to the terms of the deal.

Aetna intends to pay Humana shareholders $125 in cash for each Humana share owned. In an effort to pay a premium price, Aetna will offer added value to Humana shareholders by offering 83 percent of a share of Aetna stock per share of Humana stock. In other words, each Humana shareholder will receive $125 in cash and 83% of a share of Aetna stock for their current holdings.

Businesswire.com states that the deal gives 74 percent ownership of the combined companies to Aetna shareholders. Humana shareholders will own the resulting 24 percent of the new company.

States have the greatest power over insurance companies, for insurance is regulated at the state level. According to an article from modernhealthcare.com, large managed care companies like Cigna and Humana will not be able to merge in states that turn down their proposals. The former Insurance commissioner of the State of Georgia, John Oxendine, publically stated that “a handful of commissioners could really stop it nationwide” in reference to the Aetna-Humana as well as the Anthem-Cigna mergers happening concurrently.

According to this CNBC, 10 states have approved the Humana-Aetna merger. Forbes states that Aetna needs to secure 20 states before it can fully acquire Humana. Hearings in the states determine whether or not Aetna will have to divest lines of current business. In Florida, a judge ruled that current customers of Humana and CarePlus will not have to switch insurance carriers in the state’s effort to regulate competition. Furthermore, the State of Florida sruck a deal with Aetna to expand its offerings in Florida’s health insurance exchange—Aetna must expand into 5 new counties by 2018.

As of February 22, 2016, Aetna is trading at $106 and Humana is trading at $169. Aetna’s formal offer to purchase Humana shares at $230 in cash and stock still stands. The discount valuation poses problems for both companies as the deal awaits approval. For instance, the share price of Aetna has decreased since the formal merger terms were announced. Humana shareholders will receive 83 percent of an Aetna share for each share Humana owned. Since the value of Aetna shares by 25 percent, each Humana shareholder’s 83 percent holding of one Aetna share per Humana share will be devalued by 25 percent. Of course, stocks fluctuate in value constantly, but the 25 percent is a significant decrease in earnings.

Philip Strang is a Certified Agent/Broker with American Exchange. Contact him by telephone at 1-888-995-1674 or by email at p.strang@americanexchange.com.

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