Aetna is buying Coventry Health Care for $5.6 billion--plus it's assuming Coventry's debt, thereby increasing the deal's value to $7.3 billion--in a move that will boost Aetna's position in the growing Medicare and Medicaid markets.
The deal is part of a growing merger and acquisition trend between larger commercial insurers and Medicare and Medicaid companies, including WellPoint buying Amerigroup for $4.9 billion and Cigna's $3.8 billion purchase of HealthSpring.
Aetna will add more than 5 million members, including 1.5 million Medicare members, to its total enrollment while increasing its share of government-based revenue from 23 percent to more than 30 percent, reported The Wall Street Journal.
"It's a deal that almost had to happen," Thomas Carroll, a Stifel Nicolaus & Co. analyst, told Bloomberg. "For Aetna to really compete effectively amongst the other large national managed care companies, they have to do more in terms of gaining market share in the commercial business as well as getting a bigger foothold in Medicare and Medicaid, which are the growth areas in managed care over the next decade."
Since Bethesda, Md.-based Coventry primarily serves individuals and government agencies, Aetna can use the acquisition to expand further into the individual and government markets. "Coventry's historical strength with small businesses and individuals will balance Aetna's strength" with big employers, Aetna CEO Mark Bertolini said on a conference call with analysts, Bloomberg noted.
He added that the deal, which is expected to close in mid 2013, could result in $50 billion revenue between the two companies, according to Reuters.
Buying Coventry also allows Aetna to eliminate $400 million annually from its expenses by 2015 through cutting corporate overhead while boosting enrollment, reported The Hartford Courant.
Aetna spokeswoman Cynthia Michener, however, said the two companies will operate separately until the acquisition closes. "After that, we will begin a staged integration process that will involve employees of both companies," she told the Courant. "We expect to address any overlap in similar functions over time."