Humana, United Nix Deal on Report of $900-Million Charge

Humana Inc. and United HealthCare Corp. on Monday mutually agreed to call off their merger after United’s startling announcement last week of a $900-million charge that sent its stock plummeting.

Shareholders were set to vote on the proposed agreement, which would have been the largest merger in the managed-care industry, at the end of this month. But the companies released a statement Monday saying that both boards decided to nix the stock deal over the weekend.

“Humana disengaged because United identified problems where it makes more sense to stand on our own,” said Greg Donaldson, spokesman for Humana. “At the time the transaction was announced in May, there were many compelling things about it. . . . Clearly, circumstances have changed.”

United’s stock dropped 46% following an announcement that it lost $565 million in the second quarter. The stock plunge caused the value of the deal to drop to $3.1 billion, far below its original $5.5-billion price tag. The deal had also called for United to assume $800,000 in Humana debt.

On Monday, United stock fell another 9% to $33.38, down $2.94 on the New York Stock Exchange. Humana shares dipped 38 cents to $17.94, also on the NYSE.

Analysts said that though the decision to call off the merger was portrayed as a mutual one, Louisville, Ky.-based Humana largely made the call.

“It’s just a case where the Humana board looked at the issues and decided it was not a good deal for them,” said Linda Varoli, an analyst at Merger Insight.

United would not answer specific questions, but spokeswoman Diana Campau said, “Given the dynamics of the marketplace it became clear that it wasn’t advantageous at this time.”

Previously, Minnetonka, Minn.-based United has said that the charge was for reorganizing into six business segments and getting out of some markets. Of the $900-million pretax charge, $620 million was for quitting certain markets.

The most glaring problem facing the company involves its Medicare services, which accounted for $120 million of the $900-million charge. The company has been earning a profit in only one-third of the markets in which it contracts with Medicare.

“The extent of the problems came as a surprise,” Humana’s Donaldson acknowledged Monday.

Humana is expected to experience less fallout from the unraveling of the deal, analysts said.