Cigmana, Wherefore Art Thou?

Is the deal off long-term, or simply just in "light of the current environment"?

It's not you, Humana; it's us—or rather, our shareholders.

One month after The Wall Street Journal reported that Cigna and Humana were in merger talks, it now reports that the deal is dead. This comes "after shareholders balked" and that the companies couldn't agree on what would have been a Cigna cash-and-stock acquisition of Humana "with a large stock component," the WSJ said.

It's a curious outcome given that "the current management [of Cigna] has wanted to own HUM for some time,” Yahoo! Finance said.

But what management might still want later and what shareholders want now appear to be two very different things.

In less than 3 days, 2 very different announcements

On a filing on Thursday, December 7, Humana voted to remove a board executive committee requirement from its bylaws and then disbanded the committee, according to a report by Bloomberg. Less than three days later — on Sunday, December 10, and before Monday's market open — Cigna announced a $10 billion stock buyback authorization.

Bloomberg reports that the change was "part of a regular governance review, with Humana spokesperson Mark Taylor stating via email: “The utility of the Executive Committee has diminished greatly over the years” with new ways of doing business like virtual meetings, said in an email.

Executive committees and virtual meetings are mutually exclusive?

On the news, Cigna shares jumped nearly 16% while Humana's declined 2.6%, according to Investopedia. This mirrors stock price fluctuations the day after the rumored deal broke on November 29 (an initial 8% drop for Cigna, roughly 5.5% for Humana).

The market spooked shareholders, Cigna rewarded them

The December 10, the WSJ story opens: "Cigna Group abandoned its pursuit of a tie-up with Humana."

No one pursues a tie-up. But that language reflects why shareholders may have balked at a deal that was predicted to spend 18-24 months in protracted regulatory review.

Predicted deal completion is one reason why share prices fluctuate when companies announce mergers. Except this merger was never announced, by Cigna or Humana. And Cigna did not comment on the matter in its stock buyback press release. 

The scuttled deal is a “short-term win” for Cigna investors per one analyst at CNBC, who adds that “taking advantage of a negative reaction” to deal reports by announcing its stock buyback plan on Sunday is “music to Cigna shareholders’ value-sensitive ears.”

Who are these shareholders? And what is Cigna saying?

Cigna's shareholders and a word from CEO David Cordani

Institutional investors represent nearly 89% of Cigna's ownership, which is not uncommon for managed healthcare companies, according to CNN Business. The world's two largest investment firms — Vanguard Group, Inc. and BlackRock — are among Cigna's largest investors, but with Vanguard holding nearly double the shares (8.01% versus BlackRock's 4.5%).

(Get the specifics of Cigna's institutional owners and its internal trading activity in this HealthLeaders brief).

In the Cigna press release announcing the company's stock buy-back, Cordani states: "We believe Cigna's shares are significantly undervalued and repurchases represent a value-enhancing deployment of capital as we work to support high-quality care, improved affordability, and better health outcomes."

"As we look at the broader landscape and the strategic opportunities before us, we will remain financially disciplined with a clear focus on executing against our strategy, delivering value for our shareholders, and investing in our future.”

Cordani added that Cigna would “consider bolt-on acquisitions aligned with our strategy, as well as value-enhancing divestitures." 

Isn’t this what the Humana deal was designed to deliver? A commercial-MA powerhouse that could better complete with UnitedHealth Group and just “made sense”— and would be worth the inevitable, painful, and protracted FTC and DOJ review? It’s certainly all anyone could talk about.

The stock buyback was framed “[i]n light of the current environment,” Cordani said in the press release.

Which environment? The years that Cigna has likely kept its sights set on Humana or the days marking the deal’s public birth and death?

Those are two very different environments. Deals like this don’t happen overnight. And if they are imminent, they aren’t generally halted this quickly. It’s possible, for any number of reasons, that the rumored deal was already headed in this direction by the time it made headlines.

The short-term versus the long-term

Several questions remain now that the Cigna-Humana deal talks are off:

• Is Cigna still interested in acquiring Humana?
• Will Cigna sell its Medicare Advantage portfolio?
• If not now, what is the right time for such a deal?

As for the “bolt-on acquisitions” Cigna is also considering, WSJ reports that the company “continues to believe in the merits of a combination with Humana.” But would Humana be that bolt-on?

In the midst of the past month’s pro-deal coverage, Reuters noted the companies’ “limited cost and revenue strategies” and that these limitations would put pressure on Cigna “to deliver value by running Humana better than its current management."

These same limited synergies existed when Cigna entered the Medicare Advantage market by acquiring HealthSpring more than a decade ago — a market it wants now to exit.

In breaking the broken Humana deal, WSJ reported that Cigna "continues to explore the sale of its Medicare Advantage business, which could fetch several billion dollars in a divestment." Cigna’s buyback announcement confirmed that the company will “value-enhancing divestitures” and Bloomberg has reported that Health Care Service Corporation — an independent licensee of the Blue Cross Blue Shield Association — is eyeing Cigna’s Medicare Advantage portfolio.

So, will the time ever be right for a deal with Humana?

Factors may include the results of Cigna’s stock buyback, whether there will be an Administration change in Washington, and whether the Medicare Advantage market remains a “gold rush” for long enough for a Humana acquisition to make sense.

Bankrate notes that stock buybacks help those who want to exit and those who want to stay. Cigna’s stock buyback could help identify which investors are in which camp. Few are likely to exit in the near term, given that Cigna’s shares jumped 16% on Monday, the largest company increase in 14 years, per MarketWatch.

As for the MA gold rush, the WSJ writes: “Medicare Advantage is still a highly attractive business, and it will continue to grow indefinitely as seniors age into it. The opportunity just might not be as stellar as it once was as fewer seniors convert into it, competition grows and government scrutiny increases.”