UnitedHealth Grabs PacifiCare

The $8 billion stock-and-cash deal sends PacifiCare shares soaring.
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Updated from 12:14 p.m.

UnitedHealth

(UNH) - Get Report

is back on the acquisition trail.

The fast-growing managed health care giant agreed Wednesday to buy rival

PacifiCare Health Systems

(PHS)

for $8 billion in stock and cash.

The deal marries two leaders in the emerging area of so-called consumer-driven health plans. Investors and policymakers alike have embraced these plans as a way to bring down skyrocketing health care costs. The companies also said their merger will offer more services and simpler programs for older patients.

Shares of PacifiCare surged 13% on the report of the deal, adding $9.57 to $82.25. UnitedHealth, whose shares have risen fivefold over five years, gave back 27 cents to $52.96.

Meanwhile, shares of

Medco

(MHS)

dropped 4% in heavy trading as investors worried that the PacifiCare deal would displace Medco as UnitedHealth's pharmacy benefit manager. Medco and UnitedHealth issued a late afternoon press release professing continued cooperation and a "commitment to a long-term relationship."

Under Wednesday's agreement, PacifiCare holders will get 1.1 UnitedHealth shares and $21.50 in cash for each PacifiCare share. That deal gives them about $79.80 a share in value for each share. A year ago the stock fetched just over $35.

"Over the past several years, we have focused on strengthening our core operations while providing innovative new solutions to today's health care challenges," said PacifiCare chief Howard Phanstiel. "We have now reached a point where it makes sense for PacifiCare to join with a strong national partner that can help us reach the next level in leveraging technology and scale to offer a broad range of competitive products and services that improve the affordability and quality of health care."

"This combination will bring the best of both companies forward in a manner that respects each one's unique history and contributions while advancing a national presence that can help address a highly fragmented health care system," said UnitedHealth Group CEO William McGuire. "We believe that we will together advance on a critical goal -- making the health care system work better for people."

UnitedHealth said it expects its stand-alone earnings per share will grow by at least 15% in 2006, "without consideration of gains from UnitedHealth Group's own Medicare Part D programs or from the acquisition of PacifiCare."

Just last quarter, PacifiCare pointed to its booming Medicare business -- made even more important by looming Medicare reforms -- as one of the

key drivers of recent earnings gains.

HSA customers place money into a tax-exempt savings account to be used for health care services and then pay a low monthly premium for high-deductible insurance to cover any remaining needs. They retain any money left over in their accounts year after year and can maintain their same plans even when they change employers. The plans are designed to put consumers in control of their own health care spending and their use of health care services.

Just a year after HSAs became available, trade group America's Health Insurance Plans launched a Web site designed to educate the public about the new form of coverage. That Web site,

HSADecisions.org, received nearly 1 million hits during its first month on the Internet early this year.

Of course, UnitedHealth's prowess in that area is well established. As

TheStreet.com

has reported, the Minnetonka, Minn., company is banking on explosive growth in both health savings accounts and health reimbursement arrangements to drive earnings gains for years to come. By now, the company has been a longtime favorite on Wall Street -- regularly posting bulging, double-digit quarterly profit growth.

"We suspect that many on the Street have viewed the 'move to more affordable health plans' and the 'HSA phenomenon' as something nice but not terribly meaningful or important or, quite frankly, real," Fulcrum Global Partners analyst Sheryl Skolnick wrote last month. But Skolnick points to UnitedHealth as the "one stock to own for the trend of the changing product cycle." She also highlighted PacifiCare, which last year acquired another HSA leader, as an "interesting" company.