Hillary Clinton.

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Hillary Clinton Doesn't Like Insurance Mergers. So What?

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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Don't worry so much, Wall Street: Hillary Clinton's criticism of health insurance mergers really amounts to little more than a helpful suggestion.

The Democratic presidential candidate on Wednesday called for close scrutiny of two mega-mergers set to take the U.S. managed care industry from five major providers to three -- Anthem's $50 billion bid for Cigna and Aetna's $37 billion takeover of Humana. The stock market quaked as if on cue: After Clinton's comments, the spreads for both deals at one point widened by roughly $9 apiece to more than $40. "Spread" is arbitrage code for the difference between a target's current share price and the value of the takeover bid. A wider spread signals doubt that the transaction will close.

Though they narrowed slightly as the afternoon went on, the Aetna/Humana spread stood at about  $39 at the close and Anthem/Cigna stood at around $40.

Intraday spread between Humana's share price and current value of Aetna's offer

Intraday spread between Cigna's share price and Anthem's offer

That's a lot. The spread on Charter Communications' purchase of Time Warner Cable -- another deal that should get at least a close look from regulators -- is about $14. 

But why is anyone surprised by the idea that these insurance mergers are going to get close scrutiny? That has been the steady drumbeat from analysts and merger arbitrage traders since before either deal was formally announced. At best, the companies are hoping for divestiture requirements that aren't too painful. Both deals already had the widest spread of any big transaction in North America before Clinton's comments.

There's also a timing issue. Aetna and Anthem both say they expect their transactions to close in the second half of 2016. That could, in theory, be pushed back if the Department of Justice drags things out. But considering the presidential inauguration is scheduled for January 2017, it's a good bet that these deals will be largely settled one way or another before Clinton (if she's elected) unpacks her bags in the Oval Office.  

Clinton could be trying to send a message to the DOJ. But as Bloomberg Intelligence's Jennifer Rie points out, she's really just "preaching to the choir" -- the DOJ was already going to be stringent. And that doesn't necessarily spell the end for both mergers, no matter what Clinton or any other politician says, because there are guidelines for this kind of thing. "Hillary Clinton doesn't like this" is not an acceptable reason for asking a court to block a transaction.

If regulators follow the model of past deals, they will assess the combinations based on overlap in local markets. That's probably going to mean divestitures for Aetna and Humana, particularly in markets like the South and Midwest. As long those required asset sales aren't too onerous, Aetna should be able to close the purchase.

What Aetna has going for it is Humana doesn't have a huge share of the national market for providing administrative services to companies that cover their own claims (i.e. lots of big employers). That could be more problematic for Cigna and Anthem, two of the largest providers of those services.

But all of this was true yesterday, and the day before that, and last month. There's no news here.

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

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

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