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Is UnitedHealth Group a Better Partner for Cigna?

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UnitedHealth Group–Cigna deal

After deals such as Aetna (AET)–Humana, as well as Centene (CNC), the consolidation trend in the US health insurance industry is also expected to extend to the remaining major companies such as UnitedHealth Group (UNH), Anthem (ANTM), and Cigna. UnitedHealth Group, the largest health insurance company in the US, is expected to face tough competition from the post-deal entities and may acquire competitors to sustain its market dominance.

The graph below shows the market capitalization of Cigna, Anthem, and UnitedHealth Group. Based on market capitalization, UnitedHealth Group appears to be a stronger partner for Cigna.

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Cigna–Anthem deal issues

Cigna rejected Anthem’s offer to acquire it at $54 billion, including debt, due to several factors. Cigna believed that Anthem lacked a clear growth strategy, had problems related to integrating Cigna’s customers with its Blue Cross Blue Shield members, and faced a data breach in February 2015.

It is believed that Cigna’s demand for higher prices is currently being negotiated. Also, Cigna’s demand to place its CEO as the leader for the combined entity is considered to be another major roadblock for the deal.

Financial terms

Compared with Anthem’s balance sheet size of ~$62 billion, UnitedHealth Group has a stronger balance sheet, worth $86 billion. UnitedHealth Group also carries a higher cash balance and is less levered than Anthem. UnitedHealth Group also has a higher net profit margin and return on equity compared with Anthem.

Based solely on financial numbers, UnitedHealth Group and Cigna can prove to be a stronger combination than Anthem–Cigna.

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Strategic terms

UnitedHealth Group has a diversified business model, focusing on both government-sponsored and employer-sponsored customers. Additionally, both UnitedHealth Group and Cigna practice a strategy of international expansion. The deal should help Cigna to reposition itself toward the fast-growing government-sponsored segment. It should also help both companies to leverage their capabilities in international markets and achieve cost efficiencies by reducing administrative costs.

In addition to health insurance, UnitedHealth Group also has a stronghold in the pharmacy benefit management (or PBM), health and well-being, and health technology businesses. Cigna’s customers should benefit from a wide array of UnitedHealth Group’s services. On the other hand, Cigna should help to further strengthen UnitedHealth Group’s specialty insurance business.

Investors can gain exposure to UnitedHealth Group stock by investing in the Health Care Select Sector SPDR ETF (XLV). XLV holds 4.13% of its total portfolio in UnitedHealth Group stock.

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