If at first you don't succeed in M&A, keep bidding until you do. That might be the mantra that Aetna (AET) followed, letting other players in the health insurance space pay more for other assets, but ultimately getting a pretty solid company of its own in Coventry Health (CVH). While there are certainly some risks in buying a health insurance company about two months away from the U.S. presidential election, the long-term logic of the deal seems likely to hold.

The Terms Of The Deal

Aetna is buying Coventry for about $5.7 billion or a total deal value (including Coventry's debt) of about $7.3 billion. At $42.08 per share, Coventry shareholders are getting a 20% premium for a stock that has spent most of the last two years chopping between $26 and $36. As to the strange-looking $42.08 per share value, that is because this is a hybrid deal including both stock and cash - Coventry shareholders will get $27.30 per share of cash and 0.39 shares of Aetna.

All in all, it strikes me as a reasonable deal. While Coventry once enjoyed high returns on equity, a combination of medical cost pressure and pricing pressure (driven in part by the leverage enjoyed by larger rivals) had been taking its toll. At $42, Aetna's deal seems to price in a middle ground scenario of improved returns in the next five years, but not a return to the high levels of the past. As such, it seems fair to both sides - Aetna takes on the risk that things won't get significantly better, and gets the upside if they do.

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