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The Indianapolis Star
Jul 24, 2004 - 01:00 AM

by BILL THEOBALD and J.K. WALL

Anthem-Wellpoint merger - California blocks blockbuster deal;

Decision final, says insurance official
Indianapolis' chance of becoming home to the country's largest health-benefits company hit a wall Friday when California's insurance commissioner rejected the proposed $16.4 billion dollar merger of Indianapolis-based Anthem Inc. and WellPoint Health Networks Inc.

John Garamendi's announcement stunned company officials and set off a heated exchange between the politically ambitious Democratic commissioner in San Francisco and the stern Anthem Chairman, President and Chief Executive Officer Larry Glasscock in Indianapolis.

Garamendi said he was only trying to protect California consumers; Glasscock said he was just a Midwesterner trying to fairly conduct business.

"He put his own political ambitions over the welfare of the people of California," Glasscock said of Garamendi during a hurriedly called news conference at Anthem's headquarters on Monument Circle. Then, thumping the platform, he added: "I do not have a single doubt about that."

"It is prejudicial. It is unfair. It is unreasonable to the policyholders," Garamendi said of the proposed merger during a news conference that began almost as Glasscock's ended. "The money transferred to Indiana would provide 330,000 children with health care."

At the end of the day, Glasscock and WellPoint officials, who were united in their statements, appeared to be left with the sole option of taking Garamendi to court, something Glasscock said he would consider and Garamendi said he would fight.

"You really didn't give enough," Glasscock said Garamendi told him during a last-ditch, 30-minute telephone call Friday morning placed by the Anthem executive and Leonard D. Schaeffer, chairman of WellPoint, based in Thousand Oaks, Calif.

"This is a final decision," Garamendi said when asked at the news conference what it would take to make a deal.

The essential disagreement between the two is whether part of the estimated $4 billion in costs associated with the merger would be paid for by Californians. Garamendi said they would foot the cost. Glasscock said they wouldn't.

Company officials said they backed that claim in writing as part of a package of concessions valued at nearly a half-billion dollars.

Those concessions were enough to win approval for the merger Friday from the other California regulatory agency that has a say in the deal, the California Department of Managed Health Care.

That agency, whose director, Cindy Ehnes, was appointed by Republican Gov. Arnold Schwarzenegger, has regulatory control over 90 percent of the WellPoint-Anthem merger because it regulates the WellPoint subsidiary Blue Cross of California. The Department of Insurance has authority over BC Life & Health Insurance Co., a smaller subsidiary in the deal.

"We negotiated a pact that is a good deal for consumers and sends a strong message that California is a state where business is welcome," Ehnes said.

That pact also included:

* The Investment in a Healthy California Program, an initial outlay of $100 million that could result in as much as $450 million in investments to help provide health care in rural and underserved communities in California.

* The Patient Advocate Improvement Program, a $17 million effort to improve the quality of care by California Blue Cross.

* A $15 million commitment -- $5 million a year for three years -- from the WellPoint Foundation to a California state program to help provide health insurance to the needy.

In addition, Glasscock said, 21 of the top executives from Anthem and WellPoint voluntarily agreed to defer more than $100 million by waiving the right to exercise stock options early -- something that was granted under the terms of the merger agreement.

"We've been negotiating in good faith and have spent enormous time with (Garamendi's) representative negotiating these undertakings, and we believed we were making very good progress on every single front," Glasscock said.

One issue that still raised Garamendi's ire was the compensation package that 293 WellPoint executives would receive. They stand to gain $147 million to $356 million if the deal closes.

"It is unconscionable that a handful of executives will walk away with hundreds of millions of dollars from this," Garamendi said.

Before Friday's meltdown, negotiations for the merger seemed to be moving ahead steadily with approvals from regulators in 9 other states, including Indiana, company shareholders and the U.S. Department of Justice.

California was the final hurdle. Glasscock appeared at three public hearings there, and company officials offered measured responses to demands for concessions to allow the deal to go forward.

Glasscock said the first clue he had that something was amiss was a call at home from his staff Thursday evening. They had noticed Garamendi had scheduled a news conference for Friday afternoon and were told by his staff that he was going to reject the deal.

Friday morning, Glasscock and Schaeffer called Garamendi. When he learned of the decision, Glasscock said, "I was absolutely shocked and disappointed."

The company then notified the New York Stock Exchange, and trading on stock for both companies was halted at 11:48 a.m. WellPoint was at $109.78, down $1.92; Anthem was trading at $88.80, down $1.20.

Glasscock said he does not favor a partial merger of the two companies -- adding to Anthem only that portion of WellPoint governed by the approval order from the California Department of Managed Health Care.

Analysts also were cool to the idea. "In theory, you could put the merger through and carve out California, but I don't know that you would want to," said Steven Hill of First Investors.

Glasscock said company officials would review Garamendi's ruling and consider "all available options, including pursuing legal action."

He said his quest to merge the companies is not over.

"I believe this transaction is going to happen," Glasscock said. "Maybe this is my Midwestern values. But at the end of the day, I feel like the right will prevail. And I really believe that."

What's next?

Anthem CEO Larry Glasscock said the company must explore its options before deciding its next move. Those options could include:

* Filing a lawsuit - It's the only option Glasscock specifically mentioned Friday in response tothe rejection of the proposed merger.

* Continuing to negotiate with regulators - That appears pointless because the insurance commissioner has said his decision is final.

Options Glasscock rejected:

* Giving up - Glasscock said Anthem would "press our case to whatever lengths need to be
done."

* Accepting a partial merger - Some experts think Anthem could merge with the 90 percent of WellPoint over which the commissioner has no authority.

Friday's events

Anthem CEO Larry Glasscock was alerted by his staff Thursday night that California Insurance Commissioner John Garamendi would reject Anthem's proposed merger with WellPoint Health Networks, setting up this sequence of events on Friday:

11 a.m. - Glasscock and WellPoint CEO Leonard Schaeffer have a 30-minute conference call with Garamendi to hear for themselves that he will reject the deal.

11:48 a.m. - The New York Stock Exchange suspends trading of Anthem and WellPoint shares at the urging of the two companies.

12:30 p.m. - The California Department of Managed Health Care announces it has approved the merger.

2:45 p.m. - Glasscock has a news conference at Anthem's Monument Circle headquarters to announce that Garamendi will reject the merger.

3:30 p.m. - Garamendi has a news conference in San Francisco to announce his decision.

Anthem-WellPoint chronology

2003

Oct. 27: Anthem Inc. discloses its $16.4 billion friendly agreement to buy WellPoint Health Networks of California. The deal would create the largest U.S. health care benefits company, headquartered in Indianapolis, serving 26 million customers from California to Maine.

Oct. 28: WellPoint shareholders file a class-action lawsuit over the proposed merger.

2004

Feb. 27: The Justice Department gives Anthem the green light to buy WellPoint.

March 23: Anthem announces the transfer of WellPoint's licenses is approved by the Blue Cross Blue Shield Association.

May 19: The Foundation for Taxpayer and Consumer Rights, a nonpartisan advocacy group, calls on California Gov. Arnold Schwarzenegger to order regulators in California to hold a public hearing on the proposed merger.

May 21: A s pecial committee is formed by Democratic leaders in the California State Assembly to examine the pending sale. California is the only state involved to balk. The state's insurance commissioner and the Department of Managed Health Care must approve the deal.

June 9: The California State Assembly's special committee holds a half-day hearing meant to give consumer groups, regulators and others time to air concerns about the proposed takeover. At the hearing, John Garamendi, California's insurance commissioner, said the deal was "not in the best interests" of the state but stopped short of saying he would withhold his agency's approval.

June 14: T he California Public Employee's Retirement System announces opposition to the deal.

June 25: A second public hearing is held. Garamendi questions how the two companies would finance the $4 billion needed to complete the deal.

June 28: Nearly 97 percent of the voting shares at Anthem and WellPoint vote in favor of the merger.

July 9: A third California hearing is held focusing on tax issues. Anthem Chief Executive Officer Larry Glasscock promises insurance premiums will remain stable, jobs will not move from California and Blue Cross will continue its community involvement and charitable giving.

July 23: Insurance Commissioner Garamendi rejects the proposed merger. The Department of Managed Health Care announces its approval of the merger.

About the companies

The company created by Anthem's proposed merger with WellPoint would be named WellPoint Inc.

Anthem, Inc.

* Established: In 1944, by combining two Indianapolis-based insurance companies.

* Brands: Anthem Blue Cross and Blue Shield

Anthem Headquarters: Indianapolis.
Employees: about 20,000
Customers: 12.5 million
2002 revenue: $13.3 billion - profit: $549.1 million
2003 revenue: $16.8 billion - profit: $774.3 million

Wellpoint Health Networks, Inc.

* Established: In 1992. In 1996, WellPoint and Blue Cross of California merged.

* Brands: Blue Cross, Unicare

WellPoint Headquarters: Thousand Oaks, Calif.
Employees: 16,200
Customers: 15 million
2002 revenue: $17.3 billion - profit: $703.0 million
2003 revenue: $20.4 billion - profit: $935.2 million
---------------
Sources: Corporate Web sites, Disclosure Inc.
Robert Dorrell / The Star
----------------
Star reporter Norm Heikens and Bloomberg News contributed to this story.
Contact the author Bill Theobald at: (317) 444-6602 or BILL.THEOBALD@INDYSTAR.COM




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