Universal American Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of health insurer Universal American (NYS: UAM) looked like they needed a trip to the emergency room as they bled out as much as 18% after the company announced a sizable acquisition.

So what: Universal announced today that it's buying privately held APS Healthcare for $227.5 million. APS is a health management company that Universal hopes will help it expand its reach in government-funded health-care programs. Specifically, it's hoped that the combined company will be able to win more business with "dual eligibles" -- that is, patients that qualify for both Medicare and Medicaid.

Now what: A given investors' reaction to the deal may depend largely on why they invested in Universal in the first place. The acquisition is far from ideal for investors that have flocked to the company because they viewed it as a near-term buyout candidate; it less likely that a buyer will step in soon.

For investors that bought with a longer view, the move could be good news if it does help Universal win more lucrative business. Of course for the sub-$1-billion Universal, a $228 million purchase is no small matter, so investors should keep a close watch to make sure that management hasn't bitten off more than it can chew.

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