Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
That's not to say that I saw this one coming. The rivals in the pharmacy-benefits business didn't seem all that likely to tie the knot, despite the obvious synergies in a bigger-is-better industry. They're rivals, after all.
But then Medco lost contracts with California pension fund Calpers, the Federal Employees Program, and UnitedHealth Group (NYSE: UNH ) , the latter of which made up 17% of its revenue last year. Suddenly, joining forces seemed a lot more appealing.
Pharmacy benefits managers make their money in volume, especially for their mail-order business. Sharing fixed costs over a larger number of prescriptions is just what the margin doctor ordered. All told, the companies expect to be able to cut $1 billion in costs by combining the two companies.
More importantly -- because that's only 1% of the total costs for the combined company -- the new structure should help the companies win additional contracts. The obvious loser here is CVS Caremark (NYSE: CVS ) , which was in the No. 2 spot in terms of revenue. UnitedHealth might bring its pharmacy-benefits business back in-house and potentially try to pick up additional contracts, but Express Scripts and Medco are in a better place to handle a challenge by the health insurer as a combined company.
Medco's investors will receive $28.80 in cash and 0.81 shares of Express Scripts in the deal. Given the obvious synergies and the drive to lower health-care costs in this country, I think investors should hold onto those sharez, and perhaps even consider using the cash to buy more shares of Express Scripts.
If you'd like another opinion on what to do with your Express Scripts shares, grab a free trial to Stock Advisor, where Medco has been a pick since 2008.