Does the Aetna Inc (NYSE:AET) And CVS Health Corp Merger Make Sense?

October 30, 2017, 11:43 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Recently, the Wall Street Journal reported rumors of the likelihood of CVS Health Corp (NYSE:CVS) announcing a deal to acquire Aetna Inc (NYSE:AET), which is a healthcare benefits company. The move seems to be motivated by recent news that Amazon.com, Inc. (NASDAQ:AMZN) has received regulatory approval to enter the pharmacy distribution market in several states.

Article Summary

There are rumors that CVS Health is about to acquire Aetna Inc.

The merger is motivated by the likelihood of Amazon.com entering the health industry.

There are several benefits and drawbacks associated with the merger.

Here’s the trading report on AET.

The fact that Amazon.com is a well-known killer of many of the traditional retail markets, might be the main reason why the CVS board is considering the acquisition of Aetna. However, the opinion among analysts is split as to whether the merger makes financial sense or not.

Firstly, those arguing against the merger cite the fact that CVS shares are currently undervalued such that an all-stock acquisition could lead to a massive dilution of shareholder value. Aetna is also highly leveraged since it has a debt burden of about $21 billion with much lower free cash flow and operating income levels as compared to CVS.

The main argument put forth in support of the merger is that the healthcare industry is consolidating and the acquisition of Aetna is a viable vertical integration strategy. CVS started integrating services in the healthcare supply chain back in 2000 when it launched its first walk-in clinic. The company now has over 1,000 walk-in clinics operating under the MinuteClinic brand.

The trend towards consolidation in the healthcare industry is growing as evidenced by UnitedHealth Group Inc (NYSE:UNH), which currently offers its own pharmacy benefits management service. CVS Health recently signed a five-year deal with Anthem Inc (NYSE:ANTM) to help the company start its own pharmacy benefits manager, IngenioRx, which is set to begin in 2020, as part of its diversification efforts.

Some of the disadvantages of the Aetna acquisition deal include the fact that Aetna is not likely to grow much faster than CVS according to its current growth trajectory. This is the worst time for CVS to initiate a merger with Aetna given that its shares are way undervalued while Aetna shares are extremely overvalued.

Therefore, despite the advantages that could accrue from the Aetna-CVS merger, chief among them being the dominant position that CVS would have in the healthcare supply chain, there are significant disadvantages associated with the deal that cannot be ignored.

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