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Unlocking value in health plan M&A

Sometimes the deals don't deliver


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The pace of consolidation among commercial health plans is increasing. From a low point in the recession year of 2009, the number of merger and acquisition (M&A) transactions in the sector has increased annually and is approaching pre-recession levels. But executives who contemplate M&As should take note: the evidence of recent years suggests that unlocking financial value from such deals can be a 50-50 proposition at best.

Our analysis of 44 transactions between 2006 and 2012 points to a startling conclusion: fewer than half actually led to sustained improvements in comparative market value three years after the deal closed. Notably, the majority of these sought geographical expansion, revenue diversification, or increased presence in the Medicare and Medicaid markets as their rationale, but a financial justification (i.e. value creation) is often an accompanying long-term goal.

Is unlocking financial value the most important barometer of whether a transaction met expectations when viewed in retrospect? After all, M&A activity among health plans is often justified by a wide range of motivations – enrollment growth, improved service to members, access to new markets, diversification of service offerings, global expansion, and others.

The fact is that value creation – improving operating margins, enhancing the balance sheet, and providing shareholder value – is one of the most commonly used way investors, industry experts, and parties to the transaction assess the effectiveness of the deal.

Our analysis suggests many fall short.

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