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Cigna to buy HMO
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February 28, 1997: 6:52 p.m. ET
Insurance and health care company a $1.7 billion purchase of Healthsource
From Correspondent Rhonda Schaffler
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NEW YORK (CNNfn) -- Insurance and health care conglomerate Cigna Corp. on Friday announced plans to acquire health-maintenance organization Healthsource Inc. for $1.7 billion in cash and debt.
Health care companies are under pressure by providers to keep costs down, and the route to higher returns in this business is consolidation. Last year alone there were 29 health care mergers.
Cigna said it will issue a tender offer in the next five business days to exchange each share of Healthsource stock for $21.75 in cash, a 28 percent premium on the stock's current value.
Cigna said its acquisition of Hooksett, N.H.-based Healthsource would boost earnings through about $75 million in reduced pre-tax costs. Revenue would further be enhanced by the addition of Healthsource's 1.1 million HMO members and 4.5 million medical and dental insurance customers in 15 states to Cigna's customer base.
"Healthsource provides us with access to new markets, enhances our competitive position in others and fits well with our managed care and indemnity business," Wilson Taylor, Cigna's chief executive officer, said in a statement. "We expect this acquisition to contribute to increased earnings upon full integration."
Philadelphia-based Cigna is one of the nation's largest health and life insurance companies, with operations in all 50 states. It serves 5.3 million HMO members and provides medical insurance to another 7 million people.
Michael Lewis, an insurance analyst for Dean Witter, told CNNfn Cigna is building its managed care business.(115K WAV) or
(115K AIFF)
Although both companies emphasized that cost cutting was a motivating factor in the agreement, neither made any comment about whether or not that would mean layoffs as overlapping services are eliminated.
Cigna's employee insurance benefits unit, which Healthsource will be a part of, reported that premiums totaled $18 billion in 1996 and operating income was $500 million. Healthsource recently reported a $5 million loss in 1996 based on premiums of $3.8 billion.
Pending regulatory approval, Cigna said it expected the deal to be completed by 1998.
Analysts say the proposed merger could spark another round of HMO deals. Cigna is expected to shop around for other managed care companies, while seeking a buyer for its property-casualty insurance business, which is 28 percent of its business. That's what Aetna did when it sold its property-casualty insurance line after merging with U.S. Healthcare last year.
Cigna's strategy could lead to double digit earnings growth, analysts say. For consumers, consolidation in managed care is expected to eventually lead to lower health care costs.
In New York Stock Exchange trading Thursday, Healthsource was up 4 points to close at 20-7/8, while Cigna ended down a ¼ to finish at 152-7/8.
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