What's going on?

Healthcare company CVS announced late on Sunday that it had agreed to buy American insurer Aetna for a cool $69 billion. Check your blood pressure: it�s the biggest deal of 2017 (tweet this).

What does this mean?

Aetna is America�s third-largest provider of health insurance. CVS runs about 10,000 pharmacies and also helps companies manage their pharmacy benefits programs (e.g. negotiating prices for employees� prescriptions). So these companies sit at very different positions in the healthcare food chain.


One major aim of the takeover is to marry up Aetna�s data-heavy insurance offering with CVS�s physical presence (e.g. provide some clinical services normally covered by health insurance, like eye care, in-store). Also, Aetna�s insurance offering can be combined with CVS�s pharmacy benefits management service to compete against key rival UnitedHealth, which has already moved to combine the two and is experiencing encouraging growth.

Why should I care?

The bigger picture: This deal will help test the legality of so-called �vertical mergers�.

Investors were surprised last month when the US Justice Department sued to block AT&T�s takeover of Time Warner. Because AT&T is a telecom company and Time Warner a media company, most investors assumed that the deal would not run into trouble with competition law. Similarly, CVS and Aetna are not competitors � they have fairly separate businesses, although they can be combined to offer customers a more integrated service. Given its willingness to go after the AT&T/Time Warner deal, investors are concerned that the government may also try to block this mega-merger.


For markets: It�s partly a defensive move against Amazon.

Amazon is reportedly considering entering the pharmacy industry � which would, of course, be a threat to America�s biggest pharmacy chain. By beefing up its services division and thereby giving its customers more reasons to physically visit its pharmacies, CVS is building a bigger moat around its business model.