Flashback: The Failed AOL-Time Warner Merger, and What It Tells Us About Anthem-Cigna

August 1, 2016

 

Every few years, merger mania sets in and large industries try to consolidate even further. Consumers can be forgiven for thinking that there is some beneficial purpose of these mergers. However, a KPMG study conducted last year found that 83% of mergers fail. And yet companies continue to merge on the promise that their operations will improve and that these improvements will benefit customers.

 

One of the biggest reasons mergers fail is a clash of corporate cultures. Knowing this, it is a bad sign that there are already reports that Anthem and Cigna are quarrelling. Anthem and Cigna have accused each other of violating their July 2015 merger agreement and fumbling submissions to regulators; there has also been tension about the future role of David Cordani, Cigna’s CEO, and Cigna has been rattled by the departure of several senior Anthem executives. In looking at this merger, it is helpful to look at AOL-Time Warner, a past merger that was at first hailed as a brilliant move but ultimately collapsed due to many factors, including the different culture of the two companies.

 

Sixteen years ago, AOL and Time Warner announced their merger. AOL was convinced that it would get access to Time Warner’s cable network and content, and Time Warner thought it would get tens of millions of new subscribers. But merging the cultures turned out to be very difficult; AOL was more aggressive (and arrogant) which appalled Time Warner, a more staid and corporate culture. The two companies came to despise and disrespect each other and the promised cooperation and synergies that would make this merger “transformative” never happened. The two companies eventually broke up.

 

The AOL-Time Warner merger should serve as example to the Anthem-Cigna merger. Like AOL-Time Warner, Anthem and Cigna have very different cultures and reputations. The DOJ’s complaint showcases this. The DOJ alleges that “Anthem has also earned a reputation in many markets for having poor customer service, being slow to innovate, and being difficult to work with for doctors and hospitals.” The president of Anthem’s Indiana business supports this argument, conceding that “there are some customers, some prospects who loathe us.” Meanwhile, Cigna has a reputation for innovation, and its sophisticated wellness programs have been well received by both customers and healthcare providers. The DOJ also discovered that soon after the merger was announced, two prospective customers complained to Cigna: “We hate Anthem and you guys are about to become them.” Anthem and Cigna have also publicly fought over which CEO will lead the combined company.

 

There are also significant integration problems based on the fact that Anthem is a member of Blue Cross and Blue Shield Association (“BCBSA”), and Cigna is not. For example, Anthem will be competing with and against its fellow Blues for national accounts. Anthem’s CEO testified that he did not know how the company would resolve this conflict of interest. BCBSA also has a best efforts rule that would limit the revenue Anthem can earn from brands not affiliated with the Blue network, including Cigna.

 

What do these problems mean for the companies post-merger? It could mean that the insurers will have trouble successfully integrating, which will increase costs and decrease the chances that the combined company can realize efficiencies. This is especially important considering Anthem argues that the merger should be approved based on these efficiencies. And the companies have already had trouble detailing efficiencies when pressed by state insurance regulators in public hearings.

 

The proposed Anthem-Cigna merger looks like a bad deal for all parties. The companies should learn from the failed AOL-Time Warner merger and call off the deal before they end up as yet another business school example of bad managerial decisions. Anthem already made this decision once in February 2015, after Anthem first sought to acquire Cigna. The conditions have not improved since, and have only worsened now that the DOJ is rightfully challenging the merger for its anticompetitive problems.

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