*Note: The following was originally posted as an article on LinkedIn dated June 20, 2015.
Earlier today the Wall Street Journal reported that Anthem has submitted yet another, even sweeter deal to acquire fellow industry behemoth Cigna. The deal is now valued at $184 a share. This the fourth Anthem attempt in just weeks, the moves viewed as prescient at a time when M&A chatter abounds, and in a sector ripe for sea change with many heavy hitters stepping-up to the plate.
The first question which comes to mind is whether Anthem remains prudent in a tumultuous environment, or if this mega merger is beginning to suffer from deal heat. First to explore intent, as we must understand the game. Eccles, Lanes, and Wilson writing for the Harvard Business Review remind us that, “In today’s market, the purchase price of an acquisition will nearly always be higher than the intrinsic value of the target company. An acquirer needs to be sure that there are enough cost savings and revenue generators—synergy value—to justify the premium so that the target company’s shareholders don’t get all the value the deal creates.”
So then why consider deal heat? Well, according to Jack Welch’s description of deal heat in his seminal text Winning, “In such situations, once an acquisition candidate is identified, the top people at the acquirer and their salivating investment bankers join together in a frenzy of panic, overreaching, and paranoia, which intensifies with every additional would-be acquirer on the scene.” He goes on to list seven pitfalls associated with mergers, including a warning about the sixth pitfall, paying too much. Described by Welch as “Not 5 or 10 percent too much, but so much that the premium can never be recouped in the integration.”
So… $184 a share when Cigna is listed at $156.40 at the time of this writing I ask you … is this still prudent, or is this deal starting to get a temperature? Please share your opinions and comments below, and be sure to share this article with others to give them the chance to weigh-in.
Dr. Justin Barclay is an operations research scientist focused on supporting strategy through applied research and analytics. He is a senior analyst specializing in research and data modeling for the well-being company Healthways, and serves as an assistant professor of strategy for the Jack Welch Management Institute.