Mega Merger Case Study

One of the goals of the Affordable Care Act (ACA) was to reduce healthcare spending in the US (DeMichele, 2015). However, the passage of the ACA has spurred activity that is counter to this goal of decreased spending in the form of increased hospital consolidation which many studies show has led to higher prices. While, there are many other effects of hospital consolidation such as the impact on quality of care or innovation, these topics are beyond the scope of this paper.

Omnicare, Inc., (NYSE: OCR) and CVS Health Corporation (NYSE: CVS), are two competitive firms in different industries. A press release announces that “CVS Health and Omnicare sign a definitive agreement for CVS Health to acquire Omnicare” ("CVS Health and Omnicare Sign a Definitive Agreement for CVS Health to Acquire Omnicare," 2015). The purpose of this paper is to discuss the merger of CVS and Omnicare. First, the paper describes the principal firms in the merger and the industry in which each operates. Secondly, the paper discusses the incentives to consolidate from the viewpoints of each firm. Thirdly, the writer explains the competitive environment in the industry and how it benefits the firms and society.

Unfortunately, although antitrust agencies are paying attention to recent court actions against mergers, the FTC investigates only 1-2% of consolidations (McCanne, 2014). It is also important to remember than public payers such as Medicare and Medicaid set prices to physicians and hospitals with no room for negotiating and conversely private insurers may use their market-share leverage to negotiate reimbursements. Integrative care in the form of hospital consolidation has been shown to reduce costs by 10-20% but this cost has not been shown to produce a cost savings to private insurers (Cutler & Morton, 2014).

The merger is totaled at $69 billion dollars, with CVS being a substantial drugstore chain and prescription drug provider and Aetna existing as one of the U.S.’s largest health insurers. “It’s a vertical merger—meaning CVS and Aetna don’t compete on much, so it’s about synergies from integration rather than getting rid of a competitor—so [it] shouldn’t affect Aetna’s health-insured much, other than perhaps cheaper scripts or [over the counter] treatments bought at CVS,” says Ilya Shapiro, senior fellow in constitutional studies at the Cato Institute. If approved, this deal will be the largest acquisition ever in the health industry. A problem for Aetna in the past has been that they only control the money coming in to the insurance industry. They never had control over the cost of the drugs being provided. This merger allows CVS to guarantee Aetna control over those costs, while Aetna provides CVS with needed customer flow. George Hill, a health care technology & distribution analyst with RBC Capital Markets, says that health pharmacies and providers like CVS and Aetna are continually looking for ways to make access to medication and care easier. According to Mr. Hill, this merger will provide a viable road to achieving that. Michael Newshell, an analyst who covers Aetna, says that there will be little change for consumers in the short run. “Ultimately, [the]

Paulson E. (2001). “Inside Cisco: The real story of sustained M&A growth”, John Wiley & Sons, Inc.

Over the years more healthcare organizations, like DaVita, Inc. and MedStar Health have increasingly expanded to become integrated healthcare systems through mergers, acquisitions, or joint ventures with efficiency and good performance by achieving a strategy of focusing on being more accessible with population health and providing high quality care at an affordable reduced, cost with a goal of keeping patients healthy with good medical outcomes.

The article “What the CVS-Aetna deal means for the future of health care,” by Carolyn Y. Johnson, introduces the proposed merger between CVS and Aetna. CVS is the largest pharmacy chain in the United States and Aetna is the third largest health insurer in the United States, which will create a business partnership that could transform how healthcare is dealt with in this country. Overall, the article was neutral in its reporting. It presented both the advantages as well as the drawbacks of this deal. The short term advantages of this deal would be that copays may initially be low for customers of both CVS and Aetna. This may lead to more affordable medications, but this is completely dependent on their choice to lower or raise prices. However,

A merger is a partial or total combination of two separate business firms and forming of a new one. There are predominantly two kinds of mergers: partial and complete. Partial merger usually involves the combination of joint ventures and inter-corporate stock purchases. Complete mergers are results in blending of identities and the creation of a single succeeding firm. (Hicks, 2012, p 491). Mergers in the healthcare sector, particularly horizontal hospital mergers wherein two or more hospitals merge into a single corporation, are increasing both in frequency and importance. (Gaughan, 2002). This paper is an attempt to study the impact of the merger of two competing healthcare organization and will also attempt to propose appropriate

Although Anthem is regarded as highly lucrative, the company’s profit margins are extremely low due to the highly competitive and regulated industry. Because there is limited opportunities for market growth, health insurance companies remain competitive by merging with other companies. Anthem is currently in the process of finalizing an acquisition deal with Cigna. This deal has been faced with much scrutiny and pushback from government due to monopoly regulations. If the deal does not go through, Anthem will have to pay a large penalty fee to Cigna. Along with this financial cost, Anthem would also lose time and resources that they have dedicated to this strategy over the past two years. Because of the competitive environment and high stakes, Anthem began cutting costs throughout the company.

The cost of health care in the United States remains an important concern for American consumers. The challenges for controlling costs and providing a better health care system are various and complex. These challenges, in many cases, are in the realm of the Department of Health and Human Services (HHS) or other federal or state agencies (Department of Justice, 2012). Hospitals continue to team up with other facilities, insurers and for-profit companies, although the cause of the bump in M&A activity varies. While some hospitals cite financial problems, others join forces because of collaboration mandated under the

When companies combine/merge the whole objective is to gain new opportunities, gain market share, grow the business, to become more innovative and to improve product offerings, utilizing/sharing the existing resources and data. From the case

Cost is the driver that will most likely cause healthcare organizations to merge. Most healthcare organizations have issues with spending. Most industries today are faced with a variety of obstacles in achieving or remaining profitable. The healthcare industry is no exception. Profitability is enough of a challenge under normal circumstances, but especially so during fragile economic times. Uncertain revenue streams and rising costs have many healthcare organizations understandably apprehensive.

Abernethy and Chapman are desirable because they have a steady clientele and continue to generate revenues leaving them with a net income that is favorable. Often companies will merge with another company in an effort to avoid bankruptcy, consolidate services, or expand. Over the years, we’ve seen many big-name firms merge with others. Acquisitions and mergers are becoming a trend due to the number of partner retirements and the lack of succession plans. (Sinkin and Putney, 2013) Firms such as Abernethy and Chapman might agree to an acquisition because it is often the most cost-effective way for them to increase cash flow and continue to be successful. Mergers can either be a success or a failure. When you merge organizations, you are also merging personalities which can often lead to conflict; however, merging the different levels of expertise could be beneficial to a firm. Ultimately, I believe that merging firms will create

With each passing day the health care industry is experiencing an increase in participants due to its perfect competition nature. Due to this increase the industry participants, the industry has vicious competition which in effect leads to an increased in the cost of doing business. Smaller companies within the industry are hard hit by this competition due to their limited resources and therefore find it hard to remain relevant within the industry. Due to the looming threat of closure and liquidation, small companies must explore various strategies they may use to remain in operation. On the other hand large hospitals that are looking to eliminate competition and at the same time improve on their market share and in effect their revenues, merge with those that are struggling with low profitability. These mergers are beneficial to the smaller struggling companies since they provide increased savings on company overheads and availability of specialized machinery. Growth is also expected due to the increased market share as well as the good will already established by the large company. Contrary to popular opinion, mergers are not always between a large and a small company. In the healthcare industry two small companies may come together in order to pool their resources together and be in a position to compete against the large companies.

This is a merger that creates market leadership. This is a merger that we can expect to be substantially accretive.