Deals

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

Cigna Corp. just pulled the M&A equivalent of demanding full custody in a divorce battle. Anthem Inc. now has to decide how far it's willing to take this fight.

Cigna filed suit on Tuesday to terminate its sale to Anthem and halt its would-be acquirer's efforts to appeal a federal ruling that the companies' $50 billion-plus combination would be anti-competitive. Cigna wants not only the $1.85 billion breakup fee it was promised in the event regulators blocked the deal, but damages exceeding $13 billion to compensate its shareholders for the takeover premium and merger benefits they lost. For context, that's equivalent to about a third of Cigna's revenue last year.

Anthem counter-sued on Wednesday, seeking a temporary restraining order that would bar Cigna from pulling out of the deal. 

Big Lift
Cigna is seeking damages exceeding $13 billion from Anthem. That's a lot.
Source: Bloomberg

The timing is curious. Anthem has less than three months to stage its last-ditch effort to save the deal after extending the termination deadline to April 30. (At that point, it needs consent from Cigna to prolong the transaction further.) Presumably, Cigna could have let Anthem try to speed through an appeals process and then just collect its breakup fee when that effort (almost inevitably) failed in a few months. But in Cigna's mind, Anthem didn't even have the right to extend the termination date to April 30 because it had breached the merger agreement.

Also on Tuesday, Aetna Inc. and Humana Inc. called off their $37 billion merger (on much friendlier terms, mind you), leaving both companies free to pursue other targets. The need to get going on its own alternative takeover hunt may have been one reason for Cigna to say enough is enough. Still, $13 billion in damages? It's a gutsy move and an unusual one. 

A bit of background: In 2001, Northeast Utilities filed suit alleging Consolidated Edison Inc. had wrongfully refused to complete their $7.5 billion takeover agreement and it sought about $1 billion in damages for investors' lost premium. Because of the language of the merger agreement regarding third-party beneficiaries, the court ultimately ruled in 2005 that the shareholders' right to a takeover premium existed if and when a deal was completed.  The typical boilerplate then needed to be updated to give target companies more protections against acquirers who might breach deal terms, Kevin Miller of Alston & Bird wrote in a 2006 paper. Hence this wording in the Cigna-Anthem agreement:

Cigna has the right "on behalf of its stockholders to seek equitable relief or to pursue damages suffered by Cigna (including claims for damages based on loss of the economic benefit of the mergers to Cigna’s stockholders)… in the event of the wrongful termination of this agreement or willful breach of this Agreement by Anthem.''

These kinds of clauses aren't standard across the board, though. M&A and antitrust lawyers said there were few examples that immediately came to mind of major transactions where the target company had sought both a termination fee and damages in court. The most similar is Williams Cos.' drawn-out court tussle with Energy Transfer Equity, one of the few recent M&A situations that can compete with Anthem-Cigna in terms of bellicosity. The deal collapsed on a tax technicality and Williams is now seeking as much as $10 billion of damages in addition to a $410 million breakup fee it believes it's entitled to. 

Not Much of a Premium
Cigna has gained about 8 percent since merger speculation kicked off with a bang in the health insurance industry in May 2015. That compares with a 37 percent climb from UnitedHealth Group Inc.
Source: Bloomberg

To win its case, Cigna has to show that Anthem breached the merger agreement and it's hard to say how successful it will be. Its primary argument hinges on Anthem's so-called Bias Blue integration strategy that allegedly prioritized the Blue Cross Blue Shield network above Cigna and the merger's goals. Companies often ask for significantly more in damages than they actually think they will get, but any additional payout that's awarded would obviously be more than the $1.85 billion breakup fee Anthem had agreed to.

Anthem is also fighting other legal fires. The health insurer sued Express Scripts Holding Co. last March, arguing it should have received greater price cuts on prescription drugs from the pharmacy-benefits manager. The potential for Anthem to gain a much bigger patient pool through the Cigna merger gave it an upper hand in that case that would be undermined if the deal fails. Express Scripts is countersuing, prolonging that legal conflict.  

At what point does Anthem also decide enough is enough and that it's time to just cut and run with Cigna? 

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

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net