BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO A Healthy Prognosis for Aetna at Last? How much pain have investors in Aetna, the nation's top health insurer, suffered? This much: The last time they saw their stock split, Jimmy Carter was President. And since 1996, when Aetna (APPAX) set out to turn itself into a big player in managed care, an investment of $10,000 in the stock is only worth $9,170. Throw in the dividends, and you're about even. In contrast, 10 grand in the Standard & Poor's 500-stock index would have grown to more than $22,000. Ouch. More than a few investors must now be looking to St. Jude, patron of desperate cases, as the company gets set to undergo critical surgery. If shareholders approve, Aetna by yearend will have sold its financial-services and overseas divisions to Dutch financial giant ING Group (ING). In return, Aetna investors will get $35 in cash per share, plus one share in a ''new Aetna.'' It will focus almost solely on insuring Americans' medical and dental health. Will this end shareholders' suffering? They're still in danger, but the prognosis is good. In Aetna, I spy opportunity--if only because the company's many ills have persisted so long that they're well known. By now, no one expects much. BAD BOOK. The trouble began back in 1996, when then-CEO Richard Huber paid top dollar for U.S. Healthcare. He added the health lines of New York Life Insurance two years later. To make those investments pay, Aetna started squeezing patients and doctors. But by inflexibly managing medical care, it earned their enmity. It hurt itself, too, by pricing policies too low. Then, after paying $1 billion last year for Prudential's health-insurance arm, Aetna found it had bought a book of business even less profitable than its own. Profits sank in 1999 for the second year in a row. In February, Huber got the hook, and director William Donaldson took over. By July, he had agreed to split Aetna with ING. If the ING deal goes through, curing the new Aetna will be up to John Rowe, who is set to take over as CEO. He did not comment, but Aetna's proxy statement lays out a drastic treatment plan: Cut 340,000, or 50%, of Aetna's low-paying Medicare members, raise prices on other policies, and lower overall administrative costs, both by cutting employment and by substituting online communications for some paperwork. Aetna also aims to repair relations with doctors and hospitals, in part via more flexible treatment options and payment schemes. This last task may be the one to which Rowe is best suited. A noted gerontologist, he led Mount Sinai NYU Health, a group of nonprofit New York City hospitals, through some difficult days. That, Standard & Poor's credit analyst Jack Reichman told me, may give Aetna the credibility it needs in dealing with doctors and hospitals. Whether he's fit to lead a for-profit, public company remains an open question. ''It's a different ball game,'' Reichman said. Just the same, if you look carefully at how the market is pricing Aetna's shares, much of that risk and more seems already to be reflected. Starting from $63, where Aetna's shares have been trading, and taking away the $35 a share in cash that shareholders will get from ING, that indicates a price of $28 for each share in the new Aetna--a total market capitalization of about $4 billion. That's way cheaper than leading rivals Cigna (CI) and United HealthGroup (table). As Aetna shrinks revenues and lowers its costs, the valuation gap with its rivals should narrow. Yet some sharp-penciled investors with stakes in it think that a smaller Aetna will keep generating enough cash flow to support a far higher stock price. John Schneider, manager of PIMCO Renaissance Fund (PQNAX), expects Aetna next year to earn more than $4 a share in cash. Mason Hawkins, Staley Cates, and John Buford, the trio of value investors who run Longleaf Partners Funds (LLPFX), think the new Aetna is worth more than $55 a share. I figure it's almost time for St. Jude to make way for Lazarus. For a Q&A with John Schneider, go to barker.online at AOL keyword: BW Daily QUESTIONS? COMMENTS? E-mail barkerportfolio@businessweek.com or fax (321) 728-1711 BY ROBERT BARKER _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS A Healthy Prognosis for Aetna at Last? TABLE: Aetna: Nearly Left for Dead INTERACT E-Mail to Business Week Online

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