Well Played, WellPoint!
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amerigroup Corp. (NYSE: AGP) surged yesterday morning by a whopping 38%, more than $24, after WellPoint Inc. (NYSE: WLP) announced a "definitive agreement" to acquire Amerigroup Corp. The acquisition price has been set at $92. Amerigroup’s share is currently trading at $89. If you don’t want to lose the premium, buy the stock already!
Having stated the obvious, that is, to buy the target's stock, I'm going to state something unusual now. As strange as it may sound to some, I’m going to recommend a long position on the acquirer’s stock too. In theory (and mostly in practice), the acquirer’s stock is shorted post an acquisition announcement. So, what’s different this time?
This time we are looking at an acquisition that’s going to create definite synergies. The word "definite" is the key here. Rest assured, the evidence of definitive synergies lies in WellPoint’s cash offering as opposed to stock offering. An acquirer only offers cash in an acquisition if it is sure of the synergies that will follow. A stock offering is made in cases when the acquirer is unsure. As of now, WellPoint is trading at $61.86, 3.25% up from its previous close — a signal that market has started factoring in the expected synergies. It is also important to note here that WellPoint is currently trading at almost a 20% discount from its 52 week high of $77.61. But this isn't all!
WellPoint Inc. was formed back in 2004 when WellPoint Health Networks Inc. and Anthem Inc. merged. WellPoint deals in the healthcare sector offering various Medicare and Medicaid plans to individuals and employers. Amerigroup also operates on the same lines. The acquisition is thus going to be a horizontal one, giving WellPoint a chance to expand deeper into the healthcare sector, adding diversification and economies of scale. Putting it in the words of WellPoint’s CEO, Angela F. Braly, this acquisition is going to "create an industry leader in the government sector" -- which is probably why the acquisition will not close until a green signal is received from the regulators under State’s Antitrust Act.
Nonetheless, the acquisition offer couldn’t have come at a better time. With Obamacare upheld by the Supreme Court, millions of new patients are expected to get enrolled in the state-funded Medicaid program. Once the acquisition is finalized, WellPoint will be able to serve more than 4.5 million enrollees of state-sponsored health care programs, with a foothold in over 19 states.
With no additional stock going afloat (since this is a cash offering), Amerigroup’s EPS will get bootstrapped with WellPoint’s thus giving a boost to WellPoint’s post-acquisition EPS. WellPoint will finance the $4.9 billion acquisition with cash on hand, commercial paper and debt. As of 2011, WellPoint’s cash position stands at $2.2 billion with short-term investments amounting to about $19 billion. WellPoint will receive back 42% of the acquisition price in the form of Amerigroup’s cash and investments of over $2.06 billion. The $4.9 billion promised by WellPoint is a 43% premium over Amerigroup’s Friday’s close price. The two figures pretty much cancel out each other. WellPoint struck a perfect deal!
Industry taken by a storm!
With the announcement of the acquisition yesterday morning, peer companies of the two healthcare stocks have also benefited from price surges. Centene Corp. (NYSE: CNC) saw its stock soar 20% after the acquisition announcement. Moline Healthcare, Inc. (NYSE: MOH) is up by 19%. WellCare Health Plans, Inc. (NYSE: WCG) has jumped 17.4%. The gains have been eye-popping.
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services recommend Amerigroup and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.