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3 Reasons Why Aetna Isn't Up 14% Today

By Brian Feroldi – Dec 4, 2017 at 7:54AM

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A CVS/Aetna mega-merger could be a game-changer for the American healthcare system. Too bad Wall Street doesn't think that it is going to happen.

It turns out that the rumors were true.

Investors learned on Monday that Aetna (AET) has officially accepted a takeover bid from pharmacy giant CVS Health (CVS -0.08%). This $69 billion deal values Aetna's stock at $207 per share, which represents a 14% premium to Friday's closing price.

Given the news, Aetna's stock should be soaring today. However, shares are actually down about 1% as on type this on Monday morning. That suggests that Wall Street doesn't believe that this deal will ever go through.

Why? Here are three potential reasons. 

Big fish swallowing a small fish

Image source: Getty Images.

1. Recent history 

In the last few years, we've seen a number of massive healthcare companies announce their intention to make splashy acquisitions. However, several of them have failed to materialize, including:

  • Pfizer tried to buy Allergan for $160 billion. 
  • Aetna tried to buy Humana for $37 billion.
  • Anthem tried to buy Cigna for $54 billion.
  • Walgreens Boots Alliance tried to buy Rite Aid for $10 billion in 2015.

All of these deals wound up being thwarted by regulators. (Though it is worth pointing out that a portion of Rite Aid's store base did wind up in Walgreens' hands.)

Wall Street is probably assuming that this megadeal will face a similar amount of scrutiny and will wind up suffering a similar fate. 

2. Thousands of employees would probably lose their jobs

One way that CVS Health is selling this deal to shareholders is by promising huge "synergies" in the years ahead. In fact, management is touting that this deal will deliver $750 million in near-term cost savings once completed. 

How do they plan on delivering on that number? One answer is to "streamline redundant corporate functions".

Translation: mass layoffs are on the way.

That news might not sit well with the Trump administration. Trump was elected in part because of he made campaign promises to create jobs. What's more, he recently spoke out against the AT&T Time Warner megadeal, calling it "not good for the country".

Will he also speak out against this deal? It's possible.

3. It would give other healthcare companies a template to follow

How would you react to this deal if you were the CEO of a major pharmacy retail company such as Walgreens Boots Alliance? Don't forget that this promises to turn CVS Health into a massive player in the U.S. healthcare system with annual sales of about $240 billion

Would you pick up your phone and start looking for a health insurance company to partner up with? I sure would.

If the CVS/Aetna deal goes through, it might be much harder for regulators to block deals in the future. After all, potential consolidators can use this merger as a template in the future.

Regulators know this, so they might do whatever they can now to stop this deal before others follow suit. 

What now?

CVS health and Aetna are working hard to make the case that this is a vertical merger since there isn't a lot of overlap between their two businesses. What's more, the companies are trying to argue that this deal would save the healthcare system money by creating a "uniquely integrated, community-based healthcare experience."

Will they be able to convince the government and shareholders that this deal makes sense? It's possible, but for right now, count me as a skeptic.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and Time Warner. The Motley Fool has a disclosure policy.

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