Earlier this month, CVS Health (CVS -0.80%) announced that it would acquire home health company Signify Health for $8 billion. CVS beat out big names, including Amazon and UnitedHealth Group, in its pursuit of Signify. The move would further expand CVS' reach by allowing it to provide care to patients in their homes, which can help manage chronic conditions.
But the deal isn't done just yet. And there's a possibility that it doesn't go through at all. Regulators will take a close look at the transaction, and it could face obstacles.
Regulators are concerned about CVS' power
CVS runs pharmacies, is a pharmacy benefits manager, and has insurance plans under Aetna. At a market cap of $132 billion, it's one of the largest healthcare companies in the world. Over the trailing 12 months, its revenue is north of $300 billion, putting it neck and neck with UnitedHealth Group. By comparison, Signify's sales over the past four quarters totaled $843 million.
For regulators like the Federal Trade Commission, the power that companies like CVS and UnitedHealth wield gets a lot of attention since the danger is that they become too powerful and could stifle competition. This is why even though CVS' acquisition of Signify doesn't involve a rival, it will likely face reviews from the government to ensure it doesn't hurt competition.
An antitrust lawyer, David Balto, told Reuters, "the agencies know they have to turn their attention to vertical acquisitions that can be used strategically to raise barriers to entry."
UnitedHealth is facing a challenge of its own, from the Justice Department, for its planned acquisition of health analytics company Change Healthcare. In that deal, regulators are concerned the health insurer would gain insight into its rivals' data. That review remains ongoing.
Should investors in CVS or Signify be worried?
Whether a deal goes through or not, that shouldn't change investors' outlook for CVS. The company is large enough that it could pursue other acquisitions to bolster its business. In the trailing 12 months, its free cash flow has totaled $15.9 billion, providing ample runway to pursue even bigger deals if needed. The company also reported cash and investments of roughly $15 billion as of the end of June. While adding Signify would help expand CVS' business, it's not going to fundamentally make or break CVS as an investment.
As for Signify, it had multiple big-name companies in the mix looking to acquire it. Should the deal with CVS fall through, UnitedHealth or Amazon could revisit their offers for the home health company. Signify appeared to be a coveted acquisition, and if the CVS deal doesn't happen, it's possible that another one does for a similar valuation.
However, there's more to lose for Signify investors because with an acquisition in place right now, its value isn't likely to climb a whole lot higher than where it is today. And if the transaction with CVS falls through, there could be a steep drop in price until and unless there's another deal that is announced for a comparable valuation.
Lastly, there's also the possibility that the current deal will go through, and perhaps CVS and Signify simply need to make concessions to appease regulators. The companies anticipate that it won't be until the first half of next year that the transaction will close, so they might have already been factoring in time for a regulatory review.
Regardless of what happens, there's no reason at this point to raise any red flags. It's not uncommon for large transactions to undergo reviews. But it is next to impossible to predict what decision regulators will make, and so it's best not to invest based on expectations of that.
