Healthcare is witnessing a dramatic increase in merger activity. Earlier this year United Healthcare took an interest in Aetna, Walgreens/Boots was formed, Humana has been in play, while Teva warms up to Allergan’s generic drug business. In the most recent activity, Anthem (ANTM) has offered $188/share for Cigna (CI).

It took 12 months for Anthem to convince Cigna to agree to the deal. It comes on the heels of an earlier industry consolidating merger between Aetna and Humana. These two actions will shrink the insurance provider market from five to three.

There have been larger deals in the healthcare industry when in 1999 Warner-Lambert merged with Pfizer and in 2014 when Allergan merged with Actavis. This merger will rank as #5 in size at $48 billion.

When enterprises merge, numerous strategic and tactical reasons are mentioned in press releases and rewritten strategic plans. Over time, most of the reasons used to justify the high offer prices never materialize and the remaining few produce results that are less than expected. In the case of Anthem and Cigna I believe the offer was too high.

Cigna would be insane to refuse the offer from Anthem at $188/share when the highest bid they should have reasonably expected should not have exceeded $105/share. Currently, Anthem is supporting a 25% premium above fair value at $153.83/share. If Anthem believed Cigna would add equal value to the combined company, the offer should not have exceeded $105/share with Cigna fair value being approximately $85.00/share. The offer of $188/share represents a 121% premium above fair value and a nearly 80% premium above the maximum realistic offer price.

I think Anthem may have caught a serious case of M&A fever to have offered such a large premium. I hope someone on the Board will keep track of actual versus expected merger benefits.

Maybe the SEC should worry more about unrealistic merger offers than clawing back executive bonuses from accounting errors? How many mergers would take place if the employees that lost their jobs as a result of the merger, had a potential future claim for lost income if the financial benefit of a merger did not completely materialize?

Link to Anthem chart:

Link to Cigna chart: