The lock on a captive market is probably the only good reason for a company trading at a P/E of 8 (i.e., a discount to the S&P 500's long term average of 14) to buy a target now trading at a P/E of almost 29. WellPoint only had $2.2B in cash on last quarter's balance sheet, so borrowing another $2.7B will put its long term debt over $11B. That's more than 4x its present net income, and adding Amerigroup only brings in about another $200M in net income (while assuming responsibility for another $400M in Amerigroup's long term debt). I consider any long term debt load greater than 2x net income to be dangerously high, something to be avoided in my Alpha-D Portfolio.
WellPoint may be counting on the prospect of added pricing power in a consolidating market for anyone held hostage to Medicare. This deal does not appeal to me, unless I can sell some puts under AGP before the deal closes. I may just do that if the AGP options chain remains viable for a few more days. The prospect of making some quick cash from under a stock price supported by an all-cash transaction is the only good thing I see here.
Full disclosure: No position in WLP or AGP at this time, although I reserve the right to sell cash-covered puts under AGP in the very near future.