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Humana calls off merger
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August 10, 1998: 6:24 a.m. ET
HMO cancels $5.5B deal with United HealtCare, cites drop in stock value
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NEW YORK (CNNfn) - Humana Inc. is pulling the plug on its $5.5 billion merger with United HealthCare Corp., citing a $2.9 billion drop in United HealthCare's stock value.
Humana, a Louisville, Ky., managed-care company, walked away from the deal because Humana stockholders would have received only $3.12 billion of United HealthCare stock instead of the originally announced amount.
The decision was announced Monday. The two companies said they had "mutually agreed" to end the union and that the decision was approved by both boards of directors.
On Thursday, United HealthCare said it was taking a $900 million restructuring charge. The charge dealt with job cuts, the sale of various businesses, and the surprise revelation that United HealthCare was unprofitable in several of its Medicare health-maintenance-organization plans.
The news last week, which shocked shareholders and analysts, sent shares of United HealthCare (UNH) plunging 19-3/4, or more than 37 percent, to 33-1/8 on the New York Stock Exchange.
The negative second-quarter earnings report dragged Humana (HUM) down with it. Shares of the health maintenance organization plummeted 35 percent in the wake of the report.
Humana at the time issued a release saying it would comment on its reaction only after it had a chance to explore with United HealthCare what the news meant and what effect it might have on the possible future of a combined entity. On Friday, United HealthCare shares slipped $1.5625, or 4.1 percent, to close at $36.3125.
United HealthCare's shares closed Friday at 36-5/16, down more than 4 percent. Humana's shares closed down 13/16 at 18-5/16, also off more than 4 percent.
"The timing and magnitude of this ($900 million) charge was a surprise," Morgan Stanley Dean Witter analyst Todd Richter said last week of the earnings report. "The fact that they are taking the charge now makes you wonder how far they would have (missed their mark) for the quarter. It really calls the quality of the earnings into question."
With Humana's 6 million managed care customers, the deal would have given United HealthCare a considerable competition edge against industry giants such as Aetna Inc.
Together, the two companies would have been the biggest single managed-care entity in the U.S., although the various Blue Cross & Blue Shield insurance entities combined still would be larger.
--from staff and wire reports
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