M&A Alive and Well in the Healthcare Insurance Industry
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Obama Administration's healthcare reform program certainly kicks up a lot of political chatter every time it is mentioned. But from an investment perspective, it has had one definite effect...it has brought about greatly increased merger and acquisition activity in the healthcare insurance sector. The past 10 months has seen $14.3 billion in takeover activity in the sector, according to Bloomberg.
The latest evidence of that trend was the proposed $5.7 billion offered by Aetna (NYSE: AET), the third largest U.S. health insurer, for Coventry Health Care in a bid to increase its market share in the fast-growing, government-backed Medicare and Medicaid programs. The acquisition will add more than 5 million members to Aetna's customer ranks. It also expands the share of revenues Aetna gets from government business to more than 30 percent from the current 23 percent.
The company is not worried about the deal turning sour if there are changes made to Obamacare. It believes that even if the healthcare law were overturned by the Republicans, the changes implemented would also mean plenty of business for healthcare insurers and a need for greater scale as government health programs continue to grow in a win-win situation for the company and its peers.
This deal follows on the heels of a similar move last month by Wellpoint (NYSE: WLP) to purchase Amerigroup, which specializes in Medicaid programs. The deal nearly doubled Wellpoint's Medicaid business. Under Obamacare, some 16 million additional people are projected to be covered by Medicaid (due to easier income requirements) over the next few years. These deals were preceded last year by Cigna (NYSE: CI) paying $3.8 billion to acquire HealthSpring, a provider of health insurance to over 340,000 senior citizens. This market will expand greatly in the coming decade due to the Baby Boomer generation demographics. By 2016, 8.6 million more Americans will enroll in Medicare.
So the consolidation trend in the industry is solidly in place. Do not be surprised if some of the other big players in healthcare insurance, such as Humana and UnitedHealth, make some large-sized acquisitions in the months ahead.
But of more interest to most investors are the few remaining decent-sized and well-positioned targets in the sector. Two of the companies with a target on their backs have to be WellCare Health Plans (NYSE: WCG) and Health Net (NYSE: HNT). WellCare is both a Medicare and Medicaid insurance provider while Health Net offers commercial insurance in addition to the government-sponsored plans. It won a $16.7 billion contract in 2010 from the Pentagon to provide benefits to military families in the Northeast.
Last year, almost 60 percent of WellCare's sales came from Medicaid policies. The remainder of its revenues was derived from sales of Medicare Advantage plans. The company's stock is also cheap with its PE ratio falling in June to a 3-year low. HealthNet also is cheaply valued thanks to more than a 25 percent drop in its stock this year. The company has chronically underperformed, so a takeover with a new management team may be just what the doctor ordered.
For investors looking to play this consolidation trend in the healthcare insurance industry, you better hurry. There are few smaller targets remaining and soon only the major players will be left in the field of competitors.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services recommend 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.