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The MergerSight Group: CVS Health's $69 billion Acquisition of Aetna

The MergerSight Group. info@mergersight.com

Risks and Uncertainties

Risks and Uncertainties ………………………… While the strategic rationale for the acquisition makes sense, there are a few risk factors stakeholders ought to keep in mind. First and foremost, it should be noted that it is impossible to tell how the combined company’s leverage could be used, as such a concentration of power in the healthcare system is unprecedented. Recently, the DoJ has become more sceptical of so called vertical mergers, but according to lawyers for both sides, the deal is expected to clear any regulatory difficulties. It should also be taken into account that the acquisition will initially be financed with a bridge loan. Given the long time period between the announcement, the acquisition and the financing of the long term debt to replace the bridge facility, a risk factor constitutes the unknown interest rates. Coupled with the fact that we are in a rate-hiking cycle, fluctuations on the price of long term corporate bonds are likely to affect how the market choose to view this transaction. Looking ahead, investors should keep an eye on the three american giants - Amazon, JP Morgan Chase and Berkshire Hathaway - which announced that they are forming a new health care company. For the time being, the plan will focus solely on staff of the companies, but it remains to be seen if it stays that way. The announcement was enough to sink health care stocks and CVS Health was not an exception, rendering the stock to fall 4.9%. 6 | CVS Health’s $69 billion Acquisition of Aetna Public Relations “The CVS-Aetna deal is an effort at vertical integration, which by removing rent-seeking middlemen can, in theory at least, lead to more choice. This deal could make CVS a more formidable competitor against possible new entrants, such as Amazon. Besides that, CVS could extract efficiencies by cutting out the middlemen in the health-care supply.” “The combination of a vast drugstore chain with an insurer is the first in the US, and although it will not consolidate either sector, the deal is still likely to be closely scrutinised by antitrust regulators, which are concerned about any one company amassing too much consumer power.”

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