Back to top

Analyst Blog

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

On Tuesday, UnitedHealthcare, a division of UnitedHealth Group (UNH - Analyst Report), announced its plan to acquire XLHealth Corp, a sponsor of Medicare Advantage health plans. With this acquisition, the company is expected to remain a step ahead of its competitors including WellPoint Inc. (WLP - Analyst Report)and Aetna Inc. (AET - Analyst Report) in acquiring Medicare Advantage (MA) business.

Also, as the MA business is expected to grow considerably over the next five years, the latest acquisition will be a big advantage for the company to strengthen its financials.

The all-cash deal, which is valued at approximately $2 billion, is expected to close in the first half of 2012. Immediately after the closure, the deal will be accretive to UnitedHealth Group’s earnings. UnitedHealth currently enjoys the leading position in the MA market with 18.4% market share, followed by Humana Inc. (HUM - Analyst Report) with 16.1% market share. The deal is expected to further strengthen its position in the MA market.

We have been witnessing increasing thrust in the MA space, for quite some time. An MA plan is a government program, but is offered by commercial insurers to the Medicare beneficiaries.

The first baby boomers will hit their retirement age soon and will opt for managed care plans. Health Insurers are thus looking to acquire providers of managed care plans to the seniors which in turn will help them generate higher revenues. Also, managed-care plans for Medicare is expected to generate incremental revenue of $10 billion by 2015, which would make such acquisitions valuable.

Carriers in the health insurance sector are in a race to win MA market share and the fastest way of doing this is to plan for such acquisitions. An overview of the recent deals will provide us some idea on the pace of M&A activity in this arena.

In late October, CIGNA Corp. (CI - Analyst Report) announced its intention to acquire HealthSpring Inc. for $3.8 billion. HealthSpring has a niche presence in the MA market. Following the closure of the deal, CIGNA’s current rank of 52 (with market share of 0.3%) in the MA market would jump to rank 6 (market share of 3%), thereby, enhancing its presence in the MA market as compared to its peers.

Similarly, Humana struck two deals for small Medicare Advantage plans during the third quarter 2011. In August, it announced an agreement to acquire Arcadian Management Services. Later in September, it signed a deal for MD Care. Both deals are expected to close before the year-end and enhance Humana’s MA membership by 4.1%, upon completion. 

On October 1, Aetna closed on its acquisition of Genworth’s Medigap business for $290 million. 

Also, during the first half of the year, Brentwood-based Inspiris, which provides care and care management services to elderly patients in Medicare, Medicaid and commercial insurance populations, was acquired by UnitedHealth, while CareMore Health Group was purchased by WellPoint. Thus, we can clearly conclude that Medicare Advantage has been an attractive area for consolidation recently.

Coming back, UnitedHealth ended the third quarter with cash and cash equivalents of $13.7 billion, almost a 50% increase over 2010 level. The company’s cash from operation increased 53% year over year to $7.4 billion. Going forward, we expect the company’s strong cash position to help it pursue further acquisitions.

UnitedHealth currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. However, considering its fundamentals, we are maintaining our long-term Outperform recommendation on the shares. 

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RAMBUS INC RMBS 12.43 +5.43%
BOFL HOLDING BOFI 84.98 +4.58%
DIXIE GROUP DXYN 15.23 +3.75%
SHORETEL INC SHOR 8.02 +2.95%
DAIMLER AG DDAIF 92.96 +2.88%