Unleashing a flood of reaction from both investors and healthcare professionals, Aetna rebuffed a $10 billion takeover bid last week, vowing instead to complete a full-scale turnaround on its own.
Rather than seeking a buyer, the nation's largest health insurer said it plans to split its healthcare and financial-services businesses into two publicly traded companies later this year. It also will shed some of its 35 healthcare ventures in 17 foreign countries.
The $1.5 billion Aetna expects to raise from the sale of assets will be used to pay down debt and buy back stock, said William Donaldson, the Hartford, Conn.-based insurer's new chairman and chief executive officer.
Donaldson became top man amid a management shake-up last month, less than a week before Aetna confirmed reports that it had received a joint takeover offer from rival WellPoint Health Networks and Dutch insurer ING American Insurance.
"The decision to separate our health and wealth businesses should create more value for shareholders," Donaldson told Wall Street analysts in a conference call last week. "Each of our two core businesses has great potential, and each will be better able to realize that potential as a separate company."
Aetna's plan isn't a ploy to smoke out other suitors, Donaldson added, although he said the company would remain open to "legitimate" or "responsible" offers.
In addition to splitting, Aetna said it will move away from the increasingly unpopular restrictions of its traditional HMOs and give customers more choice and control over their own care. Donaldson also suggested that Aetna may renegotiate its provider contracts, which have so infuriated doctors that some have sued.
Aetna's decision to go it alone was hailed by the Connecticut State Medical Society, which had feared that the proposed takeover would give payers too much control over physicians and patients.
"A WellPoint-Aetna merger would have been catastrophic. We're pleased in all regards that it fell through," said the medical society's executive director, Tim Norbeck. "It's bad enough that we've gone from 18 (national) insurers to six over the last five years. A merger would have made it five, creating even less leverage for caregivers. Physicians scarcely have any leverage in the system as it is."
A takeover would also have further eroded consumer choice and competition among health plans, observers said. In California, for example, both Aetna and WellPoint are already among the five plans that control 90% of the health insurance market.
Meanwhile, Aetna's plan to re-evaluate its provider contracts was seen by many as a potential olive branch.
"It's a promising gesture that Mr. Donaldson has said he wants to reach out and establish a better alliance with physicians," Norbeck said. "But it's still a very tenuous relationship right now. Aetna is going to have to demonstrate its sincerity."
The best way to do so, Norbeck added, would be for Donaldson to voluntarily eliminate the all-products clause, which requires doctors who see patients covered under one Aetna plan to see patients covered by all Aetna plans. The Connecticut medical society has already asked the state attorney general's office to investigate whether the clause violates state or federal laws.
Not all reactions to Aetna's moves were positive. Securities analysts said Aetna's game plan was unlikely to placate frustrated investors who have been clamoring for a breakup of the company and a sale of the pieces.
"It will be over a year before any incremental value is created at the company," said Geoffrey Harris, New York, an analyst at national brokerage firm Warburg Dillon Read. "We remain unclear how current Aetna management expects to achieve this turnaround on its own."
He added that Thousand Oaks, Calif.-based WellPoint was better poised to help Aetna revive its healthcare operations. WellPoint has made a number of recent purchases, including Georgia Blue Cross and Blue Shield and Rush Prudential Health Plans.
Analysts don't expect ING or WellPoint to make another bid for Aetna. Under their combined offer, ING would have taken control of Aetna's financial-services operations, leaving Aetna U.S. Healthcare to WellPoint. By adding Aetna's 21 million healthcare members to its own 7.3 million, WellPoint would have become the largest U.S. HMO virtually overnight.
Aetna has not yet decided who will head the new companies and whether one or both companies will remain in Hartford. In the meantime, the company said it would launch cost-cutting efforts that include eliminating layers of management and curbing some spending.
Aetna has struggled during the past year amid rising medical costs, lagging profits and controversy over its policies toward patients. Its problems culminated in the Feb. 25 ouster of its former chief, Richard Huber.
Analysts remain concerned about Aetna's ability to digest the huge money-losing healthcare unit of Prudential Insurance Co., which it acquired in August 1999 for roughly $1 billion. Aetna also faces a rash of class-action lawsuits and a patients' rights bills in Congress that could make it easier to sue health insurers.
But Donaldson, a co-founder of investment bank Donaldson, Lufkin & Jenrette and an Aetna board member since 1977, has been carefully reviewing operations. A first move after he took charge was to recruit turnaround specialist Robert Miller, who helped Chrysler Corp. avoid bankruptcy in the 1970s.
"There were considerations other than the financial considerations that made us not want to be responsive to the WellPoint-ING offer," Donaldson told analysts.