CVS Health Corp (NYSE: CVS) is all set to buy Aetna Inc (NYSE: AET) for approximately $69 billion in stock and cash in a unique deal that is designed to eliminate challenges in healthcare and retail. The news was made public by the two companies on Sunday.
The revolutionary deal is the most significant agreement reported this year so far. There is immense pressure on insurers to reduce medical costs, while retailers are facing high competition from new market players like Amazon.com, Inc. (NASDAQ: AMZN).
As per the terms of the contract, Aetna stockholders would be entitled to receive about 207 dollars per share, 62 dollars in stock and 145 dollars in cash. The agreement is worth $78 billion including debt.
When the transaction is finalized, three directors of Aetna, including Mark Bertolini, CEO and Chairman, will become members of the official CVS board. Further, Aetna will continue to operate as an independent business entity within the bigger firm. The existing management team of the insurer will lead the business.
According to CVS CEO and President, Larry Merlo, the deal will help combine the expertise and experience of two brilliant companies and revolutionize the healthcare industry in a significant way.
Advantages of CVS-Aetna merger
With this acquisition, CVS will be in a position to negotiate improved prices for prescription drugs that are sold via the PBM business. Also, it will strengthen the insurance business of Aetna as it will be able to offer cheaper co-payments to its customers, perhaps only in the CVS retail stores. In addition to this, there would be a stricter hold on those patients who need costlier, specialty medication (the higher profit-earning business segment).
As far as Aetna is concerned, the agreement will lead to changes in its business strategy following the blocking of its former attempt to partner with Humana. The court passed an order rejecting the merger basis some antitrust issues. Like other insurance companies in the industry, the two were trying to boost cost negotiations with PBMs and hospitals.
With the planned tie-up with Aetna, CVS will fortify its transition into the healthcare industry which started since its Caremark PBM segment acquisition in 2007. PBMs are basically third parties which negotiate the benefits of prescription drugs for commercial health plans. The two companies are looking to establish new touch points outside of expensive medical emergency rooms, which need to be paid for by the insurers.