Health Net 2009 Annual Report Download - page 41

Acquisitions, divestitures and other significant transactions may adversely affect our business.
We continue to evaluate the profitability realized or likely to be realized by our existing businesses and
operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures in
light of our core businesses and growth strategies. The success of any such acquisition or divestiture depends, in
part, upon our ability to identify suitable buyers or sellers, negotiate favorable contractual terms and, in many
cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the
acquired business into the Company’s existing operations. In the event the structure of the transaction results in
continuing obligations by the buyer to us or our customers, a buyer’s inability to fulfill these obligations could
lead to future financial loss on our part.
Potential acquisitions or divestitures present financial, managerial and operational challenges, including
diversion of management attention from existing businesses, difficulty with integrating or separating personnel
and financial and other systems, significant post-closing obligations, increased expenses, assumption of unknown
liabilities, indemnities and potential disputes with the buyers or sellers. We completed the sale of our Northeast
operations on December 11, 2009. Risks associated with that divestiture are described in “—Under the United
Administrative Services Agreements, we are obligated to provide administrative services in connection with the
wind-down and run-off of the acquired business, which exposes us to operational and financial risks” and “—
Under the agreements that govern the Northeast Sale, we have retained responsibility for certain liabilities of the
acquired business, which could be substantial.” Further, in the event the structure of the transaction results in
continuing obligations by the buyer to us or our customers, a buyer’s inability to fulfill these obligations could
lead to future financial loss on our part.
The value of our intangible assets may become impaired.
Goodwill and other intangible assets represent a significant portion of our assets. Goodwill and other
intangible assets were approximately $640 million as of December 31, 2009, representing approximately 15
percent of our total assets and 38 percent of our consolidated stockholders’ equity at December 31, 2009.
In accordance with applicable accounting standards, we periodically evaluate our goodwill and other
intangible assets to determine whether all or a portion of their carrying values may be impaired, in which case a
charge to income may be necessary. This impairment testing requires us to make assumptions and judgments
regarding estimated fair value including assumptions and estimates related to future earnings and membership
levels based on current and future plans and initiatives, long-term strategies and our annual planning and
forecasting processes, as well as the expected weighted average cost of capital used in the discount process. If
estimated fair values are less than the carrying values of goodwill and other intangible assets with indefinite lives
in future impairment tests, or if significant impairment indicators are noted relative to other intangible assets
subject to amortization, we may be required to record impairment losses against income. Any future evaluations
requiring an impairment of our goodwill and other intangible assets could materially impact our results of
operations and shareholders’ equity in the period in which the impairment occurs. A material decrease in
shareholders’ equity could, in turn, negatively impact our debt ratings or potentially impact our compliance with
existing debt covenants.
From time to time, we divest businesses that are less of a strategic fit for the company or do not produce an
adequate return. Any such divestiture could result in significant asset impairment charges, including those related
to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and
results of operations. We completed the Northeast Sale on December 11, 2009. In connection with the Northeast
Sale, we assessed the recoverability of goodwill and our long-lived assets, including other intangible assets,
property and equipment and other long-term assets related to our Northeast Operations reporting segment during
the quarter ended September 30, 2009. As a result, in the quarter ended September 30, 2009 we recorded $170.6
million in total asset impairments, including goodwill impairment of $137.0 million, impairments of other
intangible assets of $6.0 million and property and equipment of $27.6 million. During this period we also
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