Mergers and Acquisitions

12 Months Ended

Dec. 31, 2018

Acquisitions and Dispositions [Abstract]

Note 3 – Mergers, Acquisitions and Dispositions

Acquisition of Express Scripts

On December 20, 2018, Cigna acquired Express Scripts through a series of mergers (collectively, the “Merger”). Cigna Holding Company (formerly named Cigna Corporation and referred to as “Old Cigna”) and Express Scripts each merged with and into a wholly-owned subsidiary of Cigna. As a result of these transactions, Cigna became the parent of the combined company.

Old Cigna shareholders received one share of Cigna common stock in exchange for each share of Old Cigna common stock held immediately prior to the Merger. Express Scripts shareholders received (1) 0.2434 of a share of Cigna common stock and (2) cash of $48.75, without interest, subject to applicable withholding taxes (the “Merger Consideration”), in exchange for each share of Express Scripts common stock held immediately prior to the Merger. Cash consideration was funded primarily through a combination of cash available and debt financing discussed further in Note 5. After completion of the Merger, shares of Cigna common stock were listed for trading on the New York Stock Exchange.

The acquired Express Scripts business accelerates Cigna’s Go Deeper, Go Local, Go Beyond strategy by greatly increasing the Company’s ability to put medicine within reach of customers and also helping to make it more affordable. We can improve patient outcomes and help control the cost of the drug benefit by: 1) identifying products and offering solutions that improve patient outcomes and assist in controlling costs; 2) evaluating drugs for efficacy, value and price to select a cost-effective formulary; 3) offering cost-effective home delivery pharmacy and specialty services that produce cost savings for plan sponsors and better care for members; 4) leveraging purchasing volume to provide discounts to health benefit providers; and 5) promoting generic and lower-cost brands.

Merger consideration: The estimated merger consideration of $52.8 billion was calculated as follows:


(Dollars and shares in millions, except per share amounts)
Cash consideration
Express Scripts common stock outstanding		564.3
Cash consideration per share	$	48.75
Cash consideration paid to Express Scripts common stockholders	$	27,510
Cash paid in lieu of fractional shares	$	4
Cash consideration paid to Express Scripts performance share holders	$	65
Total cash consideration	$	27,579
Stock consideration
Express Scripts common stock outstanding		564.3
Per share exchange ratio		0.2434
Shares of Cigna issued to Express Scripts common stockholders		137.3
Shares of Cigna issued to Express Scripts performance share holders and other equity holders		0.3
Shares of Cigna issued to Express Scripts shareholders		137.6
Closing price of Cigna common stock on December 20, 2018	$	179.80
Total stock consideration	$	24,745
Noncontrolling interest	$	7
Fair value of other share-based compensation awards	$	479
Total merger consideration	$	52,810

Fair value of share-based compensation award. Express Scripts employees’ awards of options and restricted stock units of Express Scripts stock were rolled over to Cigna stock options and restricted stock units on the date of the acquisition. Each holder of an Express Scripts stock option or restricted stock unit received 0.4802 of a Cigna stock option or restricted stock award. The Cigna stock option exercise price was determined by using this same conversion ratio. Vesting periods and the remaining life of the options remained consistent with the original Express Scripts awards.

The Company valued the restricted stock units at Cigna’s stock price and stock options using a Black-Scholes pricing model as of the acquisition date. The assumptions used were generally consistent with those disclosed in Note 14, except the expected life of these options averaged 4.3 years and the exercise price did not equal the market value at the date of grant.

The fair value of these options and restricted stock unit awards was included in the purchase price to the extent that services had been provided prior to the acquisition based on the grant date of the original Express Scripts award and vesting period. The remaining fair value not included in the purchase price will be recorded as compensation expense in future periods over the remaining vesting periods. Most of the expense is expected to be recognized in 2019 and 2020.

Purchase price allocation: In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. Most of the goodwill ($33.7 billion) is assigned to the Health Services segment, with the remainder to the Integrated Medical segment and is not deductible for federal income tax purposes. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the closing date.


(In millions)
Cash and cash equivalents	$	3,517
Receivables		7,802
Inventory		2,483
Other current assets		600
Property and equipment		2,973
Goodwill		38,361
Other identifiable intangible assets		38,725
Other assets acquired, non-current		314
Total assets acquired		94,775
Other current liabilities		18,616
Long-term debt, including current portion		12,816
Deferred income tax liabilities		9,511
Other liabilities, non-current assumed		1,022
Total liabilities acquired		41,965
Total	$	52,810

A portion of the purchase price has been allocated to intangible assets that are presented and discussed below.

		Estimated	Estimated Useful	Amortization
(In millions)		Fair Value	Life in Years	Method
Customer relationships	$	30,210	14-29	Cash flow trended
Internal-use software⁽¹⁾		2,443	3-7	Straight Line
Trade name - Express Scripts		8,400	N/A	Indefinite
Trade name - Other		115	10	Straight Line
Total	$	41,168

(1) Reported in property and equipment.

The fair value of the customer relationships and the amortization period and method were determined using an income approach that relies heavily on projected future net cash flows including key assumptions for customer attrition, margins, and discount rates. The estimated useful life reflects the time period and pattern that Cigna expects to receive the benefits of the related cash flows.

The results of Express Scripts have been included in the Company’s Consolidated Financial Statements from the date of the acquisition. Revenues of Express Scripts included in the Company’s results for 2018 approximated $2.6 billion and Express Scripts’ results of operations were immaterial to Cigna's net income.

Unaudited pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of Express Scripts had occurred on January 1, 2017. The primary adjustments reflected in the pro forma results relate to the interest expense on the debt issued to fund the Merger, the amortization of the acquired intangible assets and the presentation of transaction related costs. Transaction related costs incurred by the Company and Express Scripts in 2018 have been presented as if they had been incurred on January 1, 2017. The pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

	Unaudited
	Year Ended December 31,
(In millions, except per share amounts)		2018		2017
Total revenues	$	149,544	$	143,288
Shareholders’ net income	$	5,632	$	4,435

Pro forma shareholders’ net income for the year ended December 31, 2017 includes $1.2 billion in transaction-related costs incurred in connection with the acquisition.

Acquisition of OnePath Life NZ Limited (“OnePath Life”)

On November 30, 2018, the Company acquired OnePath Life for NZ$700 million (approximately $480 million at closing) using internal cash resources. OnePath Life is one of the largest life insurance companies in New Zealand. This acquisition will support diversifying distribution capabilities and product offerings in the New Zealand market. It will also enable better service delivery to clients and customers. The purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair value and may change as additional information becomes available over the next several months. Goodwill has been assigned to the International Markets segment as of December 31, 2018 and is not tax deductible.

The results of this business have been included in the Company’s Consolidated Financial Statements from the date of acquisition and were not material. In addition, the pro forma effects on total revenues and net income assuming the acquisition had occurred January 1, 2017 were not material to the Company for the years ended December 31, 2018 and 2017.

Transaction-related Costs

The Company has incurred costs detailed in the table below in the acquisition of Express Scripts, the terminated merger with Anthem, Inc. (“Anthem”) and other transactions. These costs consisted primarily of fees for legal, advisory and other professional services, amortization of the Bridge Facility fees in 2018 and interest expense on debt issued to fund the Express Scripts merger through the closing date, net of investment income earned on the debt proceeds. A portion of the costs, primarily legal and advisory fees, related to the completed Express Scripts acquisition are not deductible for federal income tax purposes.

	2018				2017				2016
(In millions)	Before-tax		After-tax		Before-tax		After-tax		Before-tax		After-tax
Interest expense on newly issued debt	$	227	$	179	$	-	$	-	$	-	$	-
Net investment income on debt proceeds		(123)		(97)		-		-		-		-
Charitable contributions		200		158		-		-		-		-
Legal and advisory fees		204		185		36		23		96		95
Bridge facility fees		140		111		-		-		-		-
All other transaction-related costs		204		133		90		69		70		52
Tax (benefit) - previously non-deductible costs		-		-		-		(59)		-		-
Transaction-related costs, net	$	852	$	669	$	126	$	33	$	166	$	147