Thursday, December 13, 2018

CVS Buys Aetna

A couple of weeks ago on Wednesday, November 28, 2018 (almost a year after the deal was announced on December 3, 2017), CVS completed its purchase of health insurer Aetna.  This was of particular interest to me because I owned some Aetna shares.  I had bought them in late 2012 when I had some money to invest.  I had Aetna health insurance through my employer and (contrary to the claim by some that everybody hates their health insurer) was satisfied with their performance.  The stock seemed very cheap (in terms of price versus earnings per share) so I bought some.  This worked out quite well as I paid less then $50 per share and the sales consideration (a mix of cash and CVS stock) had value in excess of $210 per share.  So I have a capital gain in excess of $160 per share.  Unfortunately the gain is fully taxable (at capital gains rates) even though part of the purchase price was paid in CVS stock.  Fortunately I adjusted my estimated tax payments throughout 2018 to account for this.  This wasn't actually required (to avoid a penalty) since you aren't required to predict the future and pay estimated tax for income you haven't received yet but convincing the IRS of this requires filling out a complicated form in which you report your income by quarter (approximately) instead of lumping all 2018 income together.  So it seemed simpler to pay in advance although this would have meant getting a large refund if the deal hadn't gone through in 2018.

I held my Aetna shares in a brokerage account.  On Thursday (one day later) the position seemed to be in limbo but by Friday (2 days later) I had the CVS shares and money in my account.  This beats locating and and mailing in paper stock certificates which I have had to do in the past.  CVS initially said (in a statement that appears to have been removed) that the fair market value (for tax purposes) of the CVS shares I received was $79.50 per share (the CVS closing price on Tuesday).  However my broker thinks it is $80.715 (the average of the CVS high and low for Wednesday) which seems more consistent with IRS regulations.  I suppose I will go with whatever the 1099 (which I haven't received yet) says. My broker valued the fractional CVS share (for which I received cash) at $80.2644 per share.  This is close to but slightly less than the CVS closing price on Wednesday of $80.27 (perhaps there was a commission paid when the fractional shares were sold).

In order for the merger to go through CVS had to get various approvals including from the US Department of Justice (USDOJ). The USDOJ approved the deal with certain conditions which CVS agreed to.  Usually such agreements are formalized in a legal settlement which a federal judge has to approve.  Such approval is usually routine and it is normal for companies to complete a merger (as CVS and Aetna did) before the judge has signed off. However in this case the judge, Richard Leon, has been expressing doubts about the wisdom of allowing the merger.  But it is my (layman's) understanding that while the judge may not like the agreement that the USDOJ arrived at, he can't actually block the deal if the USDOJ is willing to allow it since the USDOJ can just drop their lawsuit if the judge doesn't approve the proposed settlement.  Since the main condition was that CVS sell part of Aetna's business the USDOJ has little need for a formal settlement agreement once this sale goes through (as I believe it now has). We will see if this is correct.            

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