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Best Wire


June 15, 2004

SACRAMENTO, Calif. (BestWire) - The California Public Employees' Retirement System, the nation's largest public pension fund, said it would oppose the proposed merger of WellPoint Health Networks Inc. and Anthem Inc.

An institutional investor in both WellPoint (NYSE: WLP) and Anthem (NYSE: ATH), CalPERS said it opposes WellPoint's plan to pay out "excessive" pay packages of more than $600 million in bonuses, severance payments and vested stock options to WellPoint executives, CalPERS said in a statement, citing documents released the week of June 7 by the California Department of Managed Health Care.

"This is beyond the realm of excessive," Sean Harrigan, president of CalPERS Board of Administration, said in the 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."

Under the plan, 293 executives would receive bonuses whether or not they stay with the company following the merger's completion. A "disproportionate" share would go to a handful of top WellPoint executives, with Chairman and Chief Executive Officer Leonard Schaeffer receiving the largest amount, CalPERS said. Schaeffer would become chairman of the merged company and would be entitled to $76 million in severance, stock options and enhanced retirement benefits, CalPERS said.

However, in a June 14 letter to California State Treasurer Philip Angelides, WellPoint said Anthem, not California health insurance customers, will fund payouts to WellPoint executives that result from the merger. The executive compensation program has been in place for years, is consistent with market practice and has been fully disclosed, the company said.

And because Anthem expects to retain most of WellPoint's executives, actual severance costs are estimated to be about $200 million of the $300 million in total estimated closing costs, WellPoint said in the letter. "These transaction costs, low in percentage terms vs. other mergers, will be paid by Anthem and will be more than offset by annual savings of $250 million (after two years) in reduced administrative expenses and corporate duplication," WellPoint said.

Also, the $251 million in unvested options isn't new money related to the merger, but has been earned by executives throughout the years, the company said.

Shareholders are to vote on the merger June 28. CalPERS owns 721,840 shares of WellPoint stock and 612,938 shares of Anthem stock as part of its index holdings.

CalPERS also called on other shareholders to oppose the merger and the Department of Managed Health Care to hold an immediate hearing to examine if the compensation violates the Knox Keene Act, a law passed in California in 1975 that regulates health-maintenance organizations in the state.

California Insurance Commissioner John Garamendi has urged close legislative scrutiny of the merger, citing concerns over the financial benefits for a handful of managers and directors, among other concerns, according to June 9 text of his testimony to the Senate Insurance Committee.

On June 14, the Foundation for Taxpayer and Consumer Rights also called on Gov. Arnold Schwarzenegger to delay the state's decision on the merger and conduct public hearings. The group said that in order to pay for the executive bonuses in the merger plan, $792 million in excess premium funded reserves from Blue Cross of California would be siphoned off.

But in its letter to the state treasurer, WellPoint said Blue Cross of
California will remain financially strong after the merger, and the company
will be more efficient with affordable premiums by spreading administrative costs
over a wider base.

On June 9, Anthem and WellPoint said they had received regulatory approval from Georgia to move forward with the $16.4 billion merger that would make the merged company the largest in the nation. The companies have received 10 of the 11 required state insurance regulatory approvals and are waiting for California to make a decision (BestWire, June 9, 2004).

Under the terms of the merger, which was first announced in October, WellPoint would merge into a subsidiary of Anthem, and WellPoint shareholders would receive $23.80 in cash and one share of Anthem common stock for each WellPoint share they hold, bringing the total value of the transaction to $16.4 billion, based on Anthem's closing stock price on Oct. 24. The new company would be based in Indianapolis, Anthem's current headquarters (BestWire, Oct. 27, 2003).

On the morning of June 15, WellPoint's stock was trading at $112.59 a share, down 0.01% from the previous close. Anthem's stock was trading at $89.85 a share, down 0.17%.

Anthem's subsidiaries are rated A (Excellent) by A.M. Best Co. WellPoint's subsidiaries are rated A, A- (Excellent) or B++ (Very Good).