Anthem Inc.'s proposed takeover of WellPoint Health Networks Inc. last week stirred up a hornet's nest among investors, governance experts and lawyers.

The California Public Employees' Retirement System (CalPERS), which owns 721,840 shares of WellPoint stock and 612,938 shares of Anthem stock as part of the pension fund's index holdings, fired off a press release condemning the deal, citing excessive pay packages to be given to top WellPoint executives.

CalPERS also appealed to other shareowners to oppose the merger and said it would ask the Department of Managed Health Care to hold a hearing immediately to determine whether this excessive compensation violates the State Knox Keene Act.

The nation's largest pension fund is miffed because WellPoint's executives stand to receive bonuses, severance payments, and vested stock options totaling more than $600 million, according to CalPERS calculations, citing documents released last week by the California Department of Managed Health Care.

"This is beyond the realm of excessive," said Sean Harrigan, president of CalPERS Board of Administration, in a statement. "We oppose this merger because the only ones it will help are the elite corps of senior managers who have structured it in a way that benefits those without any tie to future performance of the future entity."

The potential for payouts to WellPoint's executives comes from the company's "officer change-in-control" plan. Under the plan, 293 WellPoint executives are in line to receive huge bonuses whether or not they stay with the company following the completion of the merger, CalPERS notes.

A disproportionate share of these payouts would go to a handful of top WellPoint executives, with the largest amount going to Leonard D. Schaeffer, chairman and chief executive officer of the company. CalPERS estimates he will be entitled to $76 million in severance, stock options and enhanced retirement benefits.

Institutional Shareholder Services (ISS), on the other hand, recommended approving the deal, citing the "sensible strategic rationale, significant market premium, potential cost and revenue synergies to be derived, the accretive nature of the deal and the valuation work and marketing process of the company's financial advisor."

And although CalPERS appealed to ISS to change its mind, later in the week ISS issued an in-depth follow-up report concluding that based on its analysis of the same document CalPERS cited, the $600 million severance figure is way overstated, noting it "assumes a scenario that is unlikely to occur and therefore does not accurately depict the true shareholder value transfer arising solely from the proposed merger."

ISS asserted that the major flaw in CalPERS' analysis was that the $600 million assumes all 293 officers are to be terminated next month, while ISS believes only Schaeffer is expected to resign.

The $600 million figure also overstates how many options will be exercised when the deal is completed, ISS asserts.

"All we care about is the facts, not the motivation," says Patrick McGurn, special counsel of ISS, in a follow-up interview.

Proxy advisory Glass, Lewis also recommended approving the deal, although it acknowledges that shareholders are in a bind because they are "stuck with the decision as to whether to approve a good deal that triggers lavish golden parachutes."

Even so, it noted that the deal is the best opportunity for shareholders, adding "the benefits of cost synergies and economies of scale would be otherwise unobtainable as a stand-alone business."

Meanwhile, David Katz, a partner at law firm Wachtell Lipton Rosen & Katz, fired off his own memorandum warning clients about the ramifications of CalPERS' campaign to oppose a merger based on severance, even if the deal winds up going through. He called CalPERS' opposition to the deal "a harbinger of additional conflict between institutional investors and public companies because change-in-control arrangements are an integral part of virtually all business combination transactions."

"I don't believe severance should drive the decision to do a deal unless it's a special situation," Katz says in an interview. He adds that if executives don't believe there is anything in it for them to approve a merger, they will prefer the status quo, which is not necessarily in the best interests of shareholders.

Katz also raised the possibility that CalPERS is actually more opposed to the deal because WellPoint is the parent of Blue Cross of California. He asserted that CalPERS did not cite this factor when it opposed the deal.

"It could lead to higher premiums, worse services and worse arrangements," he explains in an interview. "It [the deal] is certainly of greater interest to their members than if the transaction is in New York."

 

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