Deal Gets Clean Bill of Health

Mergers and acquisitions can be risky -- and, in many cases, downright disastrous. But in the managed health-care industry, deal-making has become a necessity for growth. An example is WellPoint (NYSE:WLP), which has become a health-care powerhouse. But the transactions can be complex and political, as seen with the company's recent combination with Anthem (NYSE:ATH).

Yesterday, we saw the latest deal in the sector: Pacificare's (NYSE:PHS) purchase of American Medical Security Group (NYSE:AMZ). The price tag comes to roughly $500 million. No doubt, American Medical shareholders were happy; the stock price surged 37% to $31.91.

Interestingly enough, Pacificare's stock price increased by 5.5% to $36.32. Then again, there is a lot to like about the deal.

American Medical will remain as a wholly owned subsidiary and maintain its headquarters in Green Bay, Wis. It's really "business as usual," and thus there should be few integration problems.

Pacificare will obtain access to the extensive distribution network of America Medical, which includes more than 32,000 independent agents. It will also position Pacificare in a major growth area for its industry; that is, individual and small group customer segments. To this end, American Medical will bring new proprietary products for these customer segments.

The transaction is expected to be accretive to earnings in 2005. As a result, Pacificare raised its 2005 net income guidance to $360 million to $375 million, which is up from $350 million to $360 million.

Over the past few years, Pacificare has been gearing up its acquisition's growth strategy. And, if this deal is any indication, the company is off to a good start.

Fool contributor Tom Taulli owns none of the shares mentioned in the article.