Thanks to some pre-announcement hype from The Wall Street Journal and a little back-of-the-envelope math, we knew that Carl Icahn hated Cigna’s proposed $54 billion deal for pharmacy benefits manager Express Scripts Holding even before he said anything. What we did not was just how much he hates it.
We can now say with some degree of certainty that he hates it a lot. Like, Bill Ackman a lot. You definitely do not want to be seating Carl Icahn next to the Cigna-Express Scripts deal in a restaurant any time soon.
WHY CIGNA’S INVESTMENT IN EXPRESS SCRIPTS MAY WELL RIVAL THE WORST ACQUISITIONS IN CORPORATE HISTORY
When Cigna entered into this agreement several months ago I believed a $60 billion purchase price made no sense, but there were at least arguments that could be made by management to try to persuade us into thinking that it was not completely ridiculous. These arguments now disappear in light of certain material events of the last month, such as Amazon’s almost certain entrance as a competitor to Express Scripts and the government’s direct challenge to the highly flawed rebate system. As a result, Express Scripts’ earnings will almost certainly be seriously diminished, but even more importantly, Express Scripts will be existentially challenged, i.e., their very existence might well come into question over the next few years. Even if they do survive, exposing Cigna, a thriving company, to these risks by acquiring Express Scripts now is inexplicably ridiculous. Purchasing Express Scripts may well become one of the worst blunders in corporate history, ranking up there with the Time Warner/AOL fiasco and General Electric’s long-running string of value destruction….
It is patently ridiculous to pay $60 billion for a company with the problems Express Scripts now faces. I rarely discuss my current market activity but, for the sake of full disclosure, I am currently long Cigna and short Express Scripts stock.
Suffice it to say there’s a lot more where that came from over at carlicahn.com. Still, the missive was not all underlined vitriol and all-bold-and-caps warning about Biblical stupidity. For instance, in spite of their apparent eagerness to pay more than twice as much as Express Scripts is worth and earn a corporate Darwin Award for the move, Icahn says he “respects” Cigna management’s “operating skill.” And that respect certainly leaps off the page.
…significant risks that management and the board have chosen to recklessly disregard….
During the weeks leading up to the deal (when Cigna was busy bidding against itself), Amazon, Berkshire Hathaway and JP Morgan formed a partnership to create a lower cost, more efficient technology-enabled healthcare solution…. Even after this announcement, Cigna management seemed unconcerned and repeatedly raised their bid for Express Scripts….
We cannot fathom how Cigna’s management and board saw fit to pay an all-time high price for Express Scripts with so many unknown risks lying dead ahead…. The fact that Cigna offered a 30% premium for Express after a 30% run up in the share price indicates Cigna management’s desperation to do a large deal at any price after being blamed for not being willing to fight for the Anthem deal. According to the proxy, amazingly Cigna repeatedly raised their offer against no competition for Express Scripts until, ultimately, they were paying a 60% premium versus where the stock was only 3 months prior. To believe that they can create significant value above this price to the Cigna shareholder is the height of arrogance in my opinion….
According to the merger proxy, Cigna and Express Scripts did start discussing a close partnership with a white-label solution…. We suspect this option was quickly disregarded because it didn’t serve management’s sub rosa goal of running a much larger company.
I mean, seriously, what is there not to like about that kind of corporate leadership?
Open Letter to Cigna Stockholders [carlicahn .com]