Hostile deals are different
The key to the merger between Cigna (CI) and Anthem (ANTM) is understanding the process companies go through when approached with an unsolicited proposal. The two companies have been in discussions for almost a year before the bear hug letter was made public. The whole sector has been the subject of merger rumors ever since late May when press reports suggested that Humana (HUM) was the subject of a possible deal.
After the deadline for Cigna to enter into exclusive negotiations passed, Anthem made its interest in Cigna public. Cigna rejected the approach soon after, and Anthem reiterated its interest.
Although this deal is hostile, it’s important to remember that most hostile deals end up being friendly. Despite all the drama, these kind of dances are often simply a negotiation over price. Corporate CEOs (chief executive officers) have a fiduciary duty to their shareholders, and the just-say-no defense usually doesn’t cut it. It’s important to note that Anthem has accused Cigna management of being more concerned about preserving management jobs and board seats than entering into a deal. This certainly won’t sit well with Cigna.
As we already discussed, Anthem referred to its offer as compelling. It’s important to remember that merger discussions use very specific language. If the acquirer uses words like “compelling” or “full” to refer to the offer, that means it has room to improve its offer.
Note that Anthem has already bumped its $174 offer, so the $184 bid isn’t its first price. That said, until you see the offer characterized as “best and final,” Anthem has room to bump. Cigna’s board of directors will almost certainly reject any offer not characterized as “best and final,” although board members may enter into exclusive negotiations before that.
One other important point is that hostile deals in highly regulated industries are rare. As a general rule, the government prefers to see less concentration than more. This deal has all sorts of regulatory issues, so it will be tough for Anthem to go fully hostile. Regulators generally prefer status quo to the risk of changing the competitive landscape.
Cigna also has a staggered board of directors, which is a powerful takeover defense. This means that only a portion of the board is up for reelection in any one year. This makes it difficult to run a proxy fight and gain control of the board.