Sunday, June 11, 2017

Management Failures - Attempted Merger of Anthem and Cigna

There are times when it’s worth looking at why strategies don’t execute as planned. Sometimes strategies fail because management uses overly aggressive financial models or blindly follows past strategy decisions regardless of the markets current state and sometimes it’s just poor execution.

One ongoing example of management failure is the Anthem-Cigna merger. In 2015, Anthem announced an offer to purchase Cigna. On paper the deal made a lot of sense, further consolidation of the health insurance market which would reduce the competitors for Anthem while expanding their presence as an option for employer driven health insurance, but a clause was included to pay Cigna $1.85 billion if the merger was not completed. From the onset, the merger wasn’t guaranteed, the Department of Justice (DOJ) sought to block the merger due to its anti-competitive nature, and in early 2017 the DOJ blocked the merger. Shortly thereafter, a public fight began between the two insurance companies. Cigna accused Anthem of improperly preparing for the court case and is now seeking damages claiming Anthem breached its agreement while Anthem says they won’t pay Cigna the fee over beliefs that Cigna didn’t fulfill their side of the bargain.

This example is a mix of a few management problems. First, poor execution. With over a year to prepare for the DOJ case there are few reasons that Anthem shouldn’t have been fully prepared, but according to those close to the proceedings, Anthem did not provide documentation to regulators in the required time frame and several of Anthem’s top executives did not primarily work at the company’s headquarters. Second, there is concern from the DOJ of a “Synergy Mirage”, a management failure where one company seeks to merge with another, but due to culture or system differences the synergies are never realized. Because Anthem and Cigna serve different customer segments, there are instances that, If the merger were approved, Anthem would be competing with and against themselves. When asked how they intended to resolve this, Anthem didn’t have an answer. Additionally, there seem to be culture differences. While likely a very minor factor for the DOJ, being in sync on the merger review process would have resolved the public fighting and created a unified front for the two companies.

While not successful, a good contrast is the attempted Aetna-Humana merger. One of the reasons that Humana was willing to be absorbed by Aetna was because the Aetna culture was most like its own and since their agreement the two companies have worked to ensure alignment. Their review process was quite amicable and free of drama.


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