Three years ago, what was then CVS Caremark announced it was changing its name to CVS Health (NYSE:CVS). A key reason given for the name change by CVS Health was "to reflect its broader healthcare commitment." That commitment just might be about to get much broader than ever before.
The Wall Street Journal reported on Thursday that CVS Health has made a $66 billion bid for Aetna (NYSE:AET), the third-largest health insurer in the U.S. If the merger happens, it would be the largest health insurance deal ever, according to Thomson Reuters. But does a CVS Health buyout of Aetna make sense? Here are three reasons why it does -- and two why it doesn't.
1. A huge new threat looms
Amazon's (NASDAQ: AMZN) ambitions in the pharmacy business have pretty much every current player in the industry shaking in their boots. And if they're not, they should be. Reports surfaced earlier this year that the e-commerce giant was thinking about selling prescription drugs online. That thinking appears to be turning into action: the St. Louis Post-Dispatch reported this week that Amazon has obtained wholesale pharmacy licenses in at least 12 states.
CVS Health makes nearly 77% of its operating profit from its retail and long-term care pharmacy business. A good chunk of that profit could have been at risk if Amazon succeeds in pharmacy like it has in other areas. A merger with Aetna looks like a smart way to diversify and mitigate the risk posed by Amazon.
2. CVS Health needs a boost
After Walgreens Boots Alliance (NASDAQ: WBA) snatched two major contracts away from CVS Health last year, the company began talking about 2017 as a "rebuilding year." CVS Health CEO Larry Merlo insisted, though, that the company would return to growth over the long run. He specifically mentioned acquisitions as one way that growth could be achieved.
3. Lots of synergies
While CVS Health's retail pharmacy business might not seem like a great fit with Aetna, its pharmacy benefits management (PBM) business certainly is. In fact, CVS Health already serves as Aetna's PBM. Aetna accounted for over 11% of CVS Health's PBM revenue in 2016. Integration of the businesses could enable more bundled services for customers.
And there could be synergies between Aetna and CVS Health's retail pharmacy business as well. The most valuable asset in managing healthcare costs is data. A combination of Aetna's insurance claims data with CVS Health's pharmacy data could give the merged companies greater insights into controlling overall healthcare costs.
Doesn't make sense
1. There's another insurer in the picture
One fly in the ointment of a potential merger between CVS Health and Aetna is that CVS Health has already announced a deal with an even bigger health insurer. Earlier this month, CVS Health announced that it would provide services to Anthem (NYSE: ANTM) for new PBM IngenioRx. The agreement takes effect on Jan. 1, 2020, and extends for five years.
Could CVS Health acquire Aetna and still be a good partner with Anthem? Perhaps. But the triangle between the three companies could be awkward, to say the least.
2. Uncle Sam probably won't like it
CVS Health's arch-rival Walgreens has already had an acquisition deal shot down by the U.S. Federal Trade Commission (FTC) this year. Aetna had to walk away from its proposed buyout of Humana after a federal court blocked the deal. There's a pretty good chance that Uncle Sam won't like a combination of one of the largest pharmacy retailers and PBMs in the country with one of the largest health insurers, either.
Investors loved the impact for Aetna with an acquisition by CVS Health. Shares of the insurer shot up on the initial reports of CVS Health's bid. There hasn't been as much love for CVS Health stock, though: Shares fell after the news broke of a potential deal. Does this first reaction mean that buying Aetna isn't a good move for CVS Health? I don't think so.
In my view, the reasons for a deal easily outweigh the reasons against it. CVS Health certainly has some hurdles to jump, especially with convincing federal regulators a merger wouldn't be bad for consumers and working out how its relationship with Anthem would move forward. However, my take is that a CVS Health acquisition of Aetna would be good for shareholders of both companies over the long run.