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Disputes at top put Anthem-Cigna merger in doubt

Posted On: May. 24, 2016 12:00 AM CST

Bickering between Anthem Inc. and Cigna Corp. executives signals that the health insurers' planned merger is looking less likely.

Private letters between the insurers' executives obtained by the Wall Street Journal show several disagreements in their pending $54 billion merger.

“The lack of progress and the issues that we see come to surface do put less of a probability in place as far as getting the deal done,” Vishnu Lekraj, senior equity analyst at Morningstar Inc. in Chicago, said Tuesday.

The discord “obviously makes it more difficult,” said Stephen Zaharuk, New York-based senior vice president at Moody's Investors Service Inc. “When you combine two cultures, you need a lot of cooperation.”

According to the Journal report, leaders of both insurers have been bickering about missing deadlines to submit data to antitrust regulators, violating their merger agreement, and falling behind the merger of rivals Aetna Inc. and Humana Inc. in the regulatory approval process.

Cigna is wary of Anthem's March lawsuit against pharmacy benefit manager Express Scripts Holding Co., which Cigna Chairman Isaiah Harris Jr. said in an April 9 letter could hurt the merger's chances of winning regulatory approval, the newspaper reported.

Other issues

Other signs also point to a growing disconnect between the insurers.

Cigna earlier this month said in a regulatory filing that the merger may not close in the second half of 2016. But Anthem CEO Joseph Swedish said at the UBS Global Healthcare Conference on Tuesday that the insurer expects to hear a decision from antitrust regulators in July, Reuters reported.

Cigna and Anthem representatives declined to comment on the letters. A Cigna spokesman also declined comment on the merger timeline, while an Anthem spokeswoman reiterated that the deal is expected to close in the second half of this year.

“Since the deal was initially struck, there have been issues of culture clash, especially among management teams as far as who is going to run what part of the business and who is going to be in charge, and which firm is going to take over for the most part moving forward,” Mr. Lekraj said.

Anthem proposed acquiring Cigna in June 2015, but it took several rounds before a deal was struck in late July. One sticking point was who would lead the company. Cigna found it “risky” for Anthem CEO Joseph Swedish to become chairman, president and CEO, Cigna said in a letter to Anthem's board of directors during June 2015 negotiations.

The July agreement said Cigna CEO David Cordani would be president and chief operating officer of the combined company, while Mr. Swedish would become chairman and CEO.

The Anthem-Express Scripts dispute is another roadblock.

“You really don't want to be tied up into large-scale, high-profile litigation when you are trying to get a major merger acquisition through the door of regulators,” Mr. Lekraj said.

With the lawsuit, uncertain timeline and Anthem Chief Financial Officer Wayne S. DeVeydt's unexpected resignation earlier this month, “all of these things together paint a picture that there are troubles and concerns, and the very tough road that we expected has become tougher,” Mr. Zaharuk said.

At this point, analysts said, the Aetna-Humana deal is more likely to obtain regulatory approval and that merger looks to be going much more smoothly.

An Aetna spokesman said Tuesday that the insurer has obtained 15 of the necessary 20 state approvals. The U.S. Justice Department also must approve the combination.

“It seems like they are ahead of the game,” Mr. Zaharuk said of the Aetna-Humana deal.

Ana Gupte, New York-based managing director and senior research analyst at Leerink Partners L.L.C., said in a research note Friday that the Anthem-Cigna merger also is at risk due to “meaningful opposition from Fortune 500 employer customers.”

Ms. Gupte reduced the odds of the Anthem-Cigna deal closing from 70% to “under 50%,” but still was positive that the Aetna-Humana deal would close.

“If the managers' teams can put their egos aside, I believe the deal would pass the Justice Department review,” Mr. Lekraj said of the Anthem-Cigna merger.