Companies are looking at deal opportunities outside their own sectors for cost advantages, market reach, profits and more as the dynamics for running global businesses change.
While the roughly $69-billion purchase of Aetna Health Insurance by goliath drugstore chain CVS Health has yet to be finalized, this, the largest takeover of the year, confirms that companies in different sectors are looking at combining resources to improve profits and grow. Announced on Sunday, the merger would combine CVS’s drugstores, clinics and prescription-distribution operation with Aetna’s health-insurance services.
With this merger, CVS and Aetna seek growth in their respective sectors. CVS executives saw their path for growth in essentially turning their 9,600 locations nationwide into full-service, community medical clinics, with needed pharmaceuticals available on-site. Executives with both companies said the merged entity will make health care more accessible to consumers, promising higher quality, lower costs and more convenience.
RBC Capital’s Frank Morgan, a healthcare industry analyst, tells Global Finance, “The combination of (Aetna’s) health and engagement model, targeted wellness solutions, and provider collaboration capabilities with CVS' scale, retail reach and broad capabilities to manage patients, creates a unique platform that we believe will be well-positioned to compete and address challenges in the US healthcare system.” He adds that while there is always some risk in executing a merger of this size and competitors can use the disruption as an opportunity to grab market share, there was low integration risk in combining two strong companies.
Cross-Sector Deal Logic
The CVS-Aetna merger will create a company big enough to take a run at the biggest health insurer in the US: UnitedHealth Group. It will also theoretically, be ready to face down Amazon.com’s anticipated entry into prescription distribution or retail drug sales—or both. Amazon, too, was a part of the broader cross-sector merger trend when it purchased Whole Foods in June for about $14 billion. The merger was not just about grocery delivery, but about changing the grocery business and how people shop for food; Amazon is looking to redefine commerce in that industry, as it has in others.
The cross-sector merger trend appears to be global in nature in 2017. Recently, Chinese automaker Zhejiang Geely Holding Group bought a controlling interest (51.5%) in the Danish financial firm Saxo Bank, for a total of $800 million. The Chinese firm saw an edge in owning a European investment bank with a focus on financial and regulatory technologies, a spokesman for Geely told Reuters at the time of the purchase in October.
Long In The Making And Here To Stay?
Cross-sector mergers are not a completely new trend, though. In 2011, Comcast bought NBC Universal for $6.5 billion in a deal that took 13 months to pass through a rigorous government regulatory process that included the Federal Communications Commission and the US Justice department.
Big, cross-industry mergers do tend to come with a lot of oversight. For example, AT&T’s current bid to acquire Time Warner for $85 billion has hit some snags—chiefly a lawsuit by the Justice Department to block the merger. The Justice Department argues that a combined AT&T-Time Warner company could use its power to raise prices on consumers.
Another example of the kind of mega deal was GE’s $13 billion takeover of Alstom, a power equipment business in 2014. As readers learned then, the deal signaled a fresh focus on GE’s core capabilities. It also generated cost synergies via industry consolidation while opening up new markets for GE because Alstom was particularly strong in developing-world nations.
Cross-sector mergers reflect the changing dynamics for running global businesses as well as changing customer preferences. For instance, CVS’s bet that you would rather go half a mile to their medical staff for a ‘drive-thru’ McDiagnosis is the same as Amazon’s bet that you would rather avoid the post-work rush at the grocery store, opting instead for the McDelivery of your pasta, Italian sausage and marinara sauce to feed the family on an average weeknight.
Now that CVS and Aetna seek to set a similar standard within the healthcare industry, will the cross-sector merger trend will maintain, pick up steam or falter? It’s a wait-and-see-game in 2018.