Why these mega-mergers? Fees, egos, and pricing power.
On Monday, a federal judge blocked Aetna’s $34-billion acquisition of Humana. Combined they would have formed the second largest health insurer, behind the also under-attack Anthem-Cigna merger. The court cited antitrust grounds related to Medicare Advantage insurance plans, where their combined pricing power would ultimately raise the costs that consumers pay for coverage.
But Wall Street loved the deal that had been announced with such great hoopla in 2015. It was the year of the mega-mergers. The bigger the better. Money was growing on trees. And investment banks would have made a bundle.
How big would the combined entity have been? In January this year, Aetna had a Medicare Advantage enrollment market share of 7.2%, and Humana of 16.9%. The largest player was UnitedHealth with 23.7% (chart). The merger would have given Aetna-Humana a share of 24.1%. And the top two players would have controlled nearly 50% of the US market. And in numerous areas, one of them would have totally dominated. That fits the definition of an oligopoly.
US District Judge John Bates put it this way in his 158-page opinion filed Monday:
Federal regulation would likely be insufficient to prevent the merged firm from raising prices or reducing benefits, and neither entry by new competitors nor the proposed divestiture to Molina [another health insurer] would suffice to replace competition eliminated by the merger.
And thus, Judge Bates said, the merger would “likely substantially lessen competition” for Medicare Advantage plans in 364 counties and also in certain Florida public insurance exchanges.
But the judge also revealed a shadier side to the deal.
Aetna threatened the government last summer with pulling out of 11 of the 15 states where it participated in the Obamacare individual insurance markets, claiming it was a “business decision.” The threat was made while the Department of Justice was investigating the merger but before it filed its antitrust lawsuit. It was a shot before the bow. After the lawsuit was filed, Aetna followed through on its threat.
And Judge Bates put his finger on it: It wasn’t just a “business decision,” he wrote. There was more to it. “Aetna tried to leverage its participation in the exchanges for favorable treatment from DOJ regarding the proposed merger.”
Aetna then tried to cover up that connection between the threat to pull out of those markets and the antitrust investigation to the point where the “repeated efforts to conceal a paper trail about the decision-making process” bordered on “malfeasance,” he wrote.
Judge Bates determined that there was “persuasive evidence that when Aetna later withdrew from the 17 counties, it did not do so for business reasons, but instead to follow through on the threat that it made earlier.”
Aetna said it is “giving serious consideration to an appeal.” But if the deal remains in its current collapsed form, a lot of money is going to reverse course, and not just in the stock market and among merger arbs: according to the DealBook, the three investment banks advising the companies could lose $88 million of their $101 million in fees:
Citigroup, which advised Aetna, would have received $45 million in fees. So far, it has already been paid $5 million. It could lose around $40 million
Lazard, which also advised Aetna, would have received $15 million. So far, it has been paid $5 million. It could lose around $10 million
Goldman Sachs, which advised Humana, would have received $41 million. So far, it has been paid $3 million. It could lose around $38 million.
And Aetna gets to pay Humana a breakup fee of about $1 billion, if the deal remains in its collapsed form.
The ripples might spread further. Last summer, while it was at it, the DOJ also sued to block Anthem’s acquisition of Cigna, which would create the largest health insurer in the US. Originally, the deal was valued at $54 billion. The case went to trial last year but the court hasn’t ruled yet.
If that deal collapses, the investment banks advising both companies will lose $93 million in fees, of the total fees of $126 million. And perhaps the judge might throw in a few revelations as well. We cannot wait.
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