Aetna (NYSE: AET) has entered into a deal for buying Humana (NYSE: HUM) for a sum of $37 billion, inclusive of debt. It definitely has its reward and just needs to make it work.
The purchase of Humana means the accomplishment of some major goals and objectives for Aetna. These include benefits for the Medicare Advantage scheme. Government sources will contribute to nearly 56 percent of the total revenue of the company. Previously this figure of government contribution stood at merely 38 percent.
Massive growth for Humana, no major impact on profits
Owing to the massive Medicare program, the membership of Humana has increased in a big way, in a market that has not really seen such progress. The earnings of Humana rose 18 percent year after year in the initial quarter.
However, till now, Humana has not been able to convert all this growth into skyrocketing profits and has not met the predicted earnings forecasts for any of the last three quarters.
Therefore, the primary task for Humana is to bring down its expenses. There is an expectation to receive yearly cost synergies amounting to 1.25 billion dollars by 2018.
It would be crucial to realize those synergies, taking into consideration the amount paid for the purchase and the loan taken in order to close the deal. The debt to capital ratio is predicted to be 46 percent when this deal gets closure. Aetna says that its capability of buying back shares would be limited during that time.
It is possible for latter point to weigh on shares, because Aetna has purchased stocks over $900 million in the last four quarters. Since Aetna has to offer justification for the scale, debt and premium of the deal, by delivering on costs, it is likely that investors would postpone any kind of victory celebrations.
What the companies say
The companies revealed in a recent news release that this complimentary association brings together Aetna’s commercial capabilities and diversified portfolio and the evolving Medicare Advantage project of Humana. The company born out of this union would help in serving the highly senior individuals part of the Medicare Advantage scheme, making it America’s second biggest managed care enterprise.
The officials from the company also added that this combined entity would help will in driving enhanced value as well as better quality health care. This is because of a reduction in administrative costs and utilization of the top internal practices of the two companies.