Health care merger’s delay has investors sweating

By Marshall Allen

Sunday, Feb. 24, 2008 | 2 a.m.

Critics of a proposed health insurance megamerger in Nevada say it would be bad for doctors, costly for patients and would weaken the already ailing health system. Proponents talk about how patients would benefit from a national network of providers and the latest technology.

But for financial speculators, something else entirely is at stake: profits on their investments. Depending on whether the merger goes through, big money can be made — or lost.

Their anxiety is growing because it is taking longer than expected to close the proposed deal between UnitedHealth Group and Sierra Health Services. At the same time, opposition is growing.

The merger, which seemed to investors a sure thing almost a year ago, now seems less certain.

“If I was a high roller, this is almost like playing a roulette wheel,” said analyst David Trout, whose company The M & A Researcher has closely followed the deal. “I would gamble on it going through. UnitedHealth is going to get this thing through.”

Depending on when an investor got in, he could make a good profit. UnitedHealth’s stock jumped from $35.90 a share to close at $41.57 the day after the merger was announced.

In the past six months Sierra Health stock has sold at $41.30 to $43 per share. Last week it hit a six-month low of $41 before closing at $41.91 Friday.

United will pay $43.50 a share for Sierra stock when the deal goes through, which could theoretically happen any day.

That could be a hefty profit if an investor times things right.

On the down side, if the deal falls through, investors will sell quickly “to avoid losing their pants,” and the stock price could plummet by about $10 a share, Trout said.

Those could be some devastating short-term losses.

“This is a risky situation,” Trout said. “If it was my money I’d be scared to bet on it.”

In fact, some are already unloading Sierra Health stock.

Louis Meyer, a New York analyst with Oscar, Gruss and Son Inc., said that the deal has not lived up to the expectations the companies initially created. Mergers “do not age like fine wine,” he said, and as time goes by the companies provide less information about what’s going on.

“The story is sort of changing, in a nuanced way, to the point where there’s a lot more questions than answers,” Meyer said.

Concern that the deal won’t close, Meyer said, could explain why Sierra Health’s stock price has dropped to its current point from more than $43 a share in January. Investors are getting nervous as time slips by, he said.

There were few naysayers in March when the two companies announced their intent to merge. But the Nevada State Medical Association and Clark County Medical Society — branches of the American Medical Association, which represents doctors — were among the first to say that the deal would give United a virtual monopoly of the health maintenance organization market in Clark County. United would control the entire Medicare HMO market, for instance.

United and Sierra Health dispute the claims about a monopoly, and for the most part the Nevada insurance commissioner agreed with them when she approved the deal in August.

The companies had promised the merger would be approved by the end of 2007.

But other merger opponents have lined up, and the Justice Department has been reviewing the merger for antitrust concerns since May — longer than the companies expected. (The Justice Department’s options include approving the merger outright, suing to block it, which is the most extreme option, or making the approval conditional upon the companies selling off a predetermined portion of their market share.)

In the meantime, United has been taking image hits because of a cascade of fines in other states that could total more than $1 billion.

If the merger does not close by Friday because the Justice Department hasn’t completed its investigation, the approval by the Nevada insurance commissioner expires. At least one analyst closely following the deal says he doesn’t expect the federal review to be completed by this week.

The insurance commissioner’s office won’t say what would happen if the deal is still outstanding when the deadline hits, but at the least it would seem to give merger opponents even more time to try to block the deal — and cause greater consternation among investors hoping to cash in.