Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The separate mega-mergers of Cigna Corp. and Humana Inc. are both on shaky ground. So are their possible alternatives. 

A federal judge blocked Humana's $37 billion takeover by Aetna Inc. on Monday, saying the deal would undermine competition. Aetna is considering appealing, but it's going to be a tough sell. The decision isn't a good sign for Anthem Inc.'s $50 billion offer for Cigna, which already faced worse antitrust odds. Should both deals go kaput, Humana will walk away with a $1 billion break-up fee, while Cigna could add $1.85 billion to its coffers.

Analysts have already been postulating about what the two companies could do with that cash, and many of their ideas have to do with finding a new partner. What better way to celebrate a government-forced divorce?

Unfortunately, the options that remain aren't quite as appealing as the deals they're leaving behind. Cigna and Humana could merge with each other, a combination the companies were reportedly considering before each got paired up with their larger suitors. Regulatory approval for such a deal seems far from a given, though, even though they have less overlap than in their current deals. Remember that antitrust experts once felt pretty good about Aetna and Humana's prospects.

Not Quite The Same Thing
Humana and Cigna have few options for recreating the benefits of their mergers with Aetna and Anthem, respectively
Source: Bloomberg

After that, the targets get significantly smaller. Humana or Cigna could strike a deal for Centene Corp., WellCare Health Plans Inc. or Molina Healthcare Inc. But instead of betting on the comparatively reliable duos of synergy and scale, they'd be forced into the position of picking winning insurance markets at a time of unprecedented uncertainty. Honestly, who knows what the health-care market will look like once President Donald Trump's administration is done with it?

Sluggards
Revenue growth has been tough to come by in the health insurance industry
Source: Bloomberg

Centene brings the most revenue to the table of that group, but the company's heavy exposure to the exchanges set up under the Affordable Care Act would seem to make it untouchable for either Humana or Cigna. Trump is using his first days in office to begin unraveling President Barack Obama's signature health-care legislation. And Cigna and Humana have already sought to distance themselves from the ACA, as the business it brought proved unprofitable.  

Five Way Fight
Instead of rapidly consolidating, competitive insurance markets such as Medicare Advantage will remain tough places to gain market share
Source: Bloomberg

WellCare has a meaningful position in Medicare Advantage, a privately administered version of the government health-care policies for the elderly generally favored by Republicans. That could be especially appealing to Cigna, which is heavily dependent on employer health-care plans. But given that market's relatively safe status in the Trump administration and its anticipated growth, any attempt to acquire WellCare would likely draw significant competition. Anthem and Aetna, should they decide to pursue new deals, will have big bankrolls even after paying break-up fees. So if Cigna wants WellCare, it's going to have to pay -- even more than WellCare's already near-record stock price.

The Less Affordable Care Stock
WellCare shares have been on a steady climb. The company agreed in November to buy Universal American for about $800 million including debt
Source: Bloomberg

Another option for any of the jilted insurers would be to take the route UnitedHealth Group Inc. has so successfully pursued and try further diversifying beyond health insurance. Cigna, Humana, Aetna and Anthem are all essentially pure-play insurers. But making a major move into a new business again involves playing Trump Roulette and guessing what sector is likely to thrive as the ACA is dismantled and something unknown takes its place.

A truly transformative deal -- like buying leading pharmacy benefit manager Express Scripts Holding Co. -- would be far more expensive and complicated than any of these insurance takeovers. The drug wholesale business is suffering as drug pricing pressure grows. And health-care providers are bracing for likely cuts in federal funding.

So good luck on that new deal hunt. You'll need it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net