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The Risk-to-Reward Ratio of the Cigna–Anthem Merger

Anthem Gets Its Deal: A Merger with Cigna Is Now Pending

(Continued from Prior Part)

Scenario analysis

In the risk-arbitrage world, a 16.5% expected return means a deal that has a lot of risk. Arbitrageurs sometimes refer to risk as “hair.” This deal is guaranteed a second request, and the regulators may simply be unable to get comfortable with the transaction, no matter what the companies offer in the way of remedies. Remember the best efforts language—if the regulators ask for so much that it kills the commercial logic of the deal, Anthem can walk away and pay the reverse termination fee of $1.85 billion.

Generally speaking, your base-case assumption has to be that the Cigna–Anthem merger closes as advertised and that you earn the spread. After all, a merger agreement is a contract. If Anthem (ANTM) tries to walk away without a MAC (material adverse change) occurring, Cigna (CI) could sue and demand specific performance. In other words, Cigna...