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

The $50 billion-plus Anthem-Cigna merger that investors had already left for dead is now one big step closer to actual death after Wednesday night's court veto. That raises a question that perhaps should have been asked a while ago: what was Anthem thinking to begin with?

Is This Still a Thing?
The difference between Cigna's stock price and the value of Anthem's takeover offer has remained above $25 since the deal was announced
Source: Bloomberg

The $1.85 billion breakup fee Anthem Inc. is on the hook for gives it a monetary reason to appeal the federal ruling that its combination with Cigna Corp. would undermine competition and it's moving forward with that immediately. The chances of Anthem winning the appeal and actually completing the deal are low, though. It also faces tough odds should it attempt to weasel out of the breakup fee by accusing Cigna of violating the merger agreement. Either way, it has some explaining to do to investors.

Anthem announced its combination with Cigna back in July 2015, just weeks after rival Aetna Inc. agreed to acquire Humana Inc. for about $37 billion (that deal is also looking unlikely after it, too, was ruled anti-competitive). Allowing Aetna and Humana to merge without attempting to find a comparable deal would have been to acquiesce to a weaker standing in the U.S. health-insurance market. Anthem would have gone from the second-largest managed-care provider by revenue to a distant third.

Going Big
Buying Cigna would have given Anthem more scale and negotiating leverage
Source: Bloomberg

But Anthem also could have waited to see what regulators would do with the Aetna-Humana transaction before entering the fray with such a large gambit. Just because your friend jumps off a cliff, it doesn't mean you have to, as the saying goes. Or if you're going to jump, pack a parachute.

There's little evidence to believe that forcing regulators to review both megadeals at the same time increased Anthem's odds of approval; if anything, it probably hurt both companies' cases. Certainly being second to announce a merger meant it was already entering the process at a disadvantage. In the rush to get a deal done, a dispute with Cigna CEO David Cordani over the leadership structure of the combined company was smoothed over, only for contentions between the two insurers to break out in full force later in the process.

Doubling Up
Anthem was already a large commercial insurer and buying Cigna would have made it all the larger
Source: Bloomberg Intelligence
Number of enrollees in the U.S. as of Dec. 31, 2015.

The disagreements further undermined an Anthem-Cigna tieup that was already on shakier ground than its sister deal, both in terms of regulatory odds and strategic logic. Buying Humana would have expanded Aetna's position in Medicare Advantage, a growing market that looks relatively safe from whatever health-care reforms President Donald Trump enacts. Because Medicare Advantage is locally-based, overlaps were (in theory at least) easier to remedy with divestitures.  Anthem, however, decided to go whole-hog into private-sector plans with the Cigna bid.

It didn't seem entirely prepared for the pushback that would elicit. Anthem and Cigna's business with national employers is difficult to carve up in pieces that can be sold off. Anthem's lawyers told the court in September that it had "no fix to propose" because a fix wasn't necessary, although Anthem CEO Joe Swedish had said in September 2015 that "no doubt, we anticipate some divestitures." Hmm... 

Just the Two of Us
Anthem and Cigna will each grow just fine on their own
Source: Bloomberg

To maintain its eligibility in the Blue Cross Blue Shield network of insurers and avoid a $3 billion fine, Anthem needs to get at least two-thirds of its revenue from those plans post-merger, so some Cigna plans would have to be converted. In states where Anthem doesn't have Blue Cross Blue Shield plans, though, the idea was to have Cigna compete against those that did. At a conference in 2015, Swedish said the process of meshing the acquisition with its Blue Cross Blue Shield requirements was "well-managed" and "well-understood." But the conflicts surrounding Anthem's membership in the network became a key tenet of the government's case and an issue that Cigna's Cordani didn't feel comfortable with.

According to Cordani's court testimony, Anthem was pursuing an integration strategy called "Bias Blue" that would have unwound his company's network by moving members to Blue Cross Blue Shield plans in both Anthem and non-Anthem states, reducing customer choice and undermining innovation. Guess the two CEOs weren't as "well-aligned" as Swedish said they were at a conference last May.

To be fair, Cordani has also perhaps been overly optimistic about the deal's regulatory odds at times. But he's not the one who has to answer to shareholders for offering up a $1.85 billion breakup fee over an ill-advised deal. Good luck on Plan B.

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

  1. Back when this deal frenzy first started, a number of analysts thought Anthem should buy Humana in order to further diversify itself with a bigger government insurance business.

To contact the author of this story:
Brooke Sutherland in New York at

To contact the editor responsible for this story:
Beth Williams at