In perhaps the biggest threat yet to Anthem's planned takeover of WellPoint Health Networks, the nation's largest public pension fund vowed last week to fight the $16 billion deal, citing excessive executive pay packages that could harm patient care and compromise shareholder value.
The California Public Employees' Retirement System-which owns about 722,000 WellPoint shares and 613,000 Anthem shares-announced last week that it would call on other major stockholders to oppose the merger on the grounds that it would trigger up to $607 million in compensation for Thousand Oaks, Calif.-based WellPoint's top executives. Shareholders of both companies are scheduled to cast their final votes on the proposed transaction June 28.
Although CalPERS owns only 0.5% of WellPoint's and Anthem's outstanding shares, some analysts speculated the giant pension fund could drum up enough opposition from institutional investors to delay the merger or alter its provisions.
"If there's a perception that CalPERS is gaining momentum and mustering a significant number of `no' votes, Anthem and WellPoint could very well postpone the final voting or consider changes to their executive compensation," said Richard Foote, a healthcare analyst with Samuel A. Ramirez & Co. in New York.
Indeed, CalPERS has been known to aggressively wield its financial and political clout to push for corporate reforms. The pension fund, for instance, was one the first organizations to call for the ouster of New York Stock Exchange Chairman Dick Grasso over his $140 million pay package last year. Grasso resigned in September 2003, and New York's attorney general filed a lawsuit last month seeking to recoup $100 million of Grasso's earnings.
At a press conference last week, California Treasurer and CalPERS board member Phil Angelides compared Grasso's "salary grab" with the "egregious" pay package WellPoint Chairman and Chief Executive Officer Leonard Schaeffer stands to receive. Schaeffer, who plans to step down as CEO once the merger is completed, would leave with $82.3 million in severance and retirement pay and $248.6 million in stock and options, all of which would vest immediately.
"This merger is the poster child for excessive executive compensation," Angelides said. "These are payouts that will be made on Day One, without any regard as to how this merger performs for shareholders in the years ahead."
As part of its campaign against the merger, CalPERS said it was urging Institutional Shareholder Services, one the nation's largest proxy advisory groups, to counsel shareholders against the deal. It also called on California's Department of Managed Health Care, which regulates the state's health plans, to hold a public hearing on the merger and to prohibit improper spending on administrative costs, such as executive compensation.
Federal regulators have already approved the merger, which would create the nation's largest health insurer with 28 million members. Of the 11 states that have a direct say over the deal, California is the only one that has yet to give its go-ahead. WellPoint owns 7 million-member Blue Cross of California, which administers CalPERS' two self-funded PPOs.
The controversy centers around WellPoint's "change of control" plan, the details of which were publicized earlier this month (June 14, p. 8). Under the plan, adopted in 2001, the company intends to grant 293 executives a total of $147 million to $356 million in bonuses and severance pay once the merger is finalized. The executives also hold $251 million in stock options, which would vest immediately if they were fired or forced to quit within three years of the deal's closing.
WellPoint this month told a state legislative committee that it expects the total payout to be closer to $200 million, an amount that would be more than offset by the $250 million in annual savings the merger is expected to generate through reduced administrative costs. The company also vehemently denied that the payouts would lead to higher premiums or fewer services for California ratepayers.
"Anthem, not California health insurance customers, will fund any payouts to WellPoint executives as a result of the merger," WellPoint Chief Financial Officer David Colby reiterated in a letter to Angelides hours after the press conference.
The letter also pointed out that the $251 million in unvested options was not new money related to the merger but was "earned by WellPoint executives through years of meeting customer needs and the resulting appreciation in the company's stock price."
At deadline, the Department of Managed Health Care had not yet decided whether to hold a public hearing on the merger.