In perhaps the most obviously beneficial merger ever, Express Scripts (Nasdaq: ESRX ) announced its plan to buy Medco Health Solutions (NYSE: MHS ) for $29.1 billion.
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.
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