uploads///Graph

Centene–Health Net Deal: Potential Risks

By

Dec. 4 2020, Updated 10:53 a.m. ET

Risks

On July 2, 2015, Centene (CNC) announced the acquisition of its peer company Health Net (HNT), for a consideration of $6.8 billion. The announcement was followed by the announcement of the Aetna (AET) and Humana deal, valued at $37 billion and considered to be the highest-priced deal in the health insurance industry.

With the health insurance industry witnessing a wave of consolidations, it is expected that a majority of acquirers may risk overpaying for their targets.

Article continues below advertisement

Post-merger integration risk

The deal between Centene and Health Net faces substantial post-merger integration risk, as both companies differ in their core business models and distribution channels. Such deals can involve cultural clashes between the employees of both companies.

Centene expects to realize synergies worth $150 million by the second year of the closure of the deal. If the deal does not realize these synergies effectively and in a timely manner, it can lead to losses for Centene.

Performance risk

As we discussed in the previous article, the Centene–Health Net deal is considered to be an overvalued transaction. Although the deal adds operational scale to Centene, it is reducing the company’s exposure to the fast-growing Medicaid segment. The transaction should diversify Centene’s revenues across the relatively slower-growing segments such as the commercial and duals segments.

The deal should reduce the business concentration and regulatory risk arising from over-reliance on government-sponsored programs. However, it can also lead to reduced profit margins for the combined Centene–Health Net entity.

Bidding war

Following the announcement of the Centene–Health Net deal on July 2, Centene’s shares fell by about 6.1%. One of the reasons for the fall involves the fear of a bidding war with UnitedHealth Group (UNH). It is expected that UnitedHealth Group might make a counteroffer for Health Net. If this counteroffer is greater than Centene’s offer, it can lead to a dissolution of the deal between Centene and Health Net.

Instead of considering individual stocks, investors can invest in diversified healthcare funds such as the iShares Dow Jones US Healthcare ETF (IYH) to minimize the impact of risks related to mergers and acquisitions. Combined, Centene and Health Net account for 0.47% of IYH’s holdings.

Advertisement

More From Market Realist

  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.