But smooth integration of NYLCare important, analysts say
HARTFORD, Conn. - Aetna Inc.'s deal to buy NYLCare Health Plans Inc., the health care unit of New York Life Insurance Co., could be a good strategic move if the integration of the company is smooth, analysts say.
As widely expected, Aetna said last week it has reached a definitive agreement to buy NYLCare for $1.05 billion. Up to another $300 million in payments may be made beginning in the year 2000 if predetermined earnings and membership objectives are achieved.
The transaction, which will be financed with fixed-income securities, is expected to be completed in the third quarter. The deal is subject to approval by federal antitrust officials and state regulators.
Richard L. Huber, Aetna's chairman and chief executive officer, said in a statement that the deal is expected to begin to add to earnings about a year from closing, resulting in about $45 million to $55 million aftertax in cuts in operating expenses beginning then. Aetna U.S. Healthcare reported $12.76 billion in 1997 revenues and $383.9 million in operating earnings.
The acquisition would add 2.2 million participants to Aetna U.S. Healthcare's membership base - increasing its total to 15.9 million, including 6.2 million health maintenance organization members.
Included in the deal is NYLCare's HMO, point-of-service, preferred provider organization and indemnity health care lines, as well as its group life and disability businesses, which generated about $3.1 billion in revenue last year. The deal accounts for the bulk of New York Life's group business, a New York Life spokesman said.
NYLCare's biggest markets include Texas, where it is the leading managed care provider, with 630,000 HMO members, and the Maryland/District of Columbia/Virginia market, where NYLCare is one of the top three managed care companies, with about 470,000 HMO members.
The deal also would increase Aetna's health plan membership in such markets as Illinois, New Jersey, New York, North Carolina, South Carolina and Washington.
Employers are expected to benefit from having a larger health insurer that would bring added leverage with providers and more efficiency and breadth to its clients, though it will reduce the number of competitors in the market, experts say (BI, March 9).
Aetna plans to take a 'market-bymarket approach' to integrating the two operations, 'and we intend to proceed on a gradual, paced timetable,' Mr. Huber said.
'By integrating the smaller, more easily absorbed markets first, and continuing to run parallel systems in the larger markets in the interim, we intend to minimize the potential for service disruption and substantially complete the integration by the end of the year 2000,' he said.
Sy Sternberg, New York Life's chairman, president and CEO, said the deal lets New York Life focus on building its core strengths in the domestic life insurance and annuity businesses, increase its portfolio of proprietary mutual funds in its asset management business and expand in international markets.
Observers say the strategy behind the deal is sound, though Standard & Poor's Corp., A.M. Best Co., Duff & Phelps Credit Rating Co. and Moody's Investors Service Inc. all have placed Aetna's ratings under review for possible downgrades, citing the financial and operational risks inherent in the deal.
'Strategically, the deal seems to make some sense,' said Arun N. Kumar, director at S&P in New York. 'It definitely strengthens Aetna's hand in certain key markets,' including New York, the District of Columbia and Texas, he said.
'If someone else had to pick up this block, it could have exerted additional pressure on Aetna's margins in these regions, so this acquisition can be probably classified as opportunistically defensive, if there is such a word,' said Mr. Kumar.
'Aetna has no fear,' said Michael LeConey, an analyst with National Securities Corp. in New York. The company has decided to pursue its strategy of focusing on managed care, and 'they clearly are prepared to stick with that plan.' Conceptually, that 'makes a lot of sense,' he said.
'There's a huge business opportunity' here, he added. But, 'it takes a lot of management skills and knowhow, we have seen, to build a huge, successful managed care operation.'
'I think they're looking at this thing from a very long-term point of view and could emerge from all this as. . .a very strong, viable company. It won't be easy, but they could,' Mr. LeConey said.
John Ward, chief executive officer of the Cincinnati-based Ward Financial Group, agreed. 'I would anticipate a challenging integration facing them,' he said.
Noting that Aetna plans to integrate the NYLCare operation gradually, Mr. Ward said, 'Our experience with integration mergers is that the companies that decide to integrate are most successful when they promptly and swiftly move forward with the integration process.'
Otherwise, the integration 'raises questions among clients and employees about what happens next, and it's a big distraction,' he said.
In light of Aetna's $8.9 billion acquisition of U.S. Healthcare in 1996, Mr. Ward said he suspects that though NYLCare 'was an opportunity they just couldn't pass up, they would probably have preferred it if the opportunity had presented itself a year or two down the road.'
Douglas L. Meyer, an analyst with Duff & Phelps Credit Rating Co. in Chicago, said that while the deal appears to make good strategic sense, there are 'operational challenges and integration risks' associated with the deal.
In addition, S&P's Mr. Kumar pointed to the goodwill on Aetna's balance sheet.
The NYLCare deal would add another $900 million of goodwill, which is the premium paid for a book of business over its asset value, Mr. Kumar noted. This is in addition to the $8.5 billion already on Aetna's books from the U.S. Healthcare deal and other acquisitions, he said.
'It's not an asset you can typically realize immediately,' according to Mr. Kumar. The acquired business' performance will determine whether the goodwill is justifiable, Mr. Kumar said.
Larry Mayewski, senior vp at Oldwick, N.J.-based Best, said that while the deal makes 'good business sense' strategically, Best also is concerned about the amount of goodwill on Aetna's books.
'The organization's going to have to improve its earnings performance over time to strengthen its position' and justify the price it paid, Mr. Mayewski said.
