Indianapolis Business Journal


This week
VOL. 24 NO. 39, DECEMBER 8-14, 2003

Anthem deal details revealed
Filing discloses some costs of $16 billion WellPoint merger

By Tom Murphy
IBJ Reporter

If the Anthem-WellPoint merger goes through as planned, investment-banking firm Goldman Sachs stands to make $20 million for advising Anthem.

WellPoint Health Networks Inc. will pay the same to Lehman Brothers for the same thing.

A dozen executives for California-based WellPoint could earn bonuses totaling a few million dollars apiece if they stick around for two years after the merger's completion.

These behind-the-scenes costs of the multibillion-dollar deal were among the bits of information released Nov. 26 when Indianapolis-based Anthem Inc. filed an S-4 registration statement with the Securities and Exchange Commission.

The inch-thick document also sheds more light on how the deal came together and the risks involved for both companies.

The two corporations announced plans Oct. 27 to merge and become the largest U.S. health-insurance company. Anthem plans to purchase WellPoint in a cash-stock deal that was valued at $16.4 billion when it was announced.

The combined company will be located in Indianapolis but retain the WellPoint name. Anthem CEO Larry Glasscock will retain his title with the new company. His WellPoint counterpart, Leonard Schaeffer, will become chairman of the board.

Leaders of both companies hope to complete the deal by mid-2004. One way they can ensure the deal goes through is by hiring investment banking firms experienced in transactions of this size to act as advisers, said Raghavendra Rau, an associate finance professor at Purdue University's Krannert School of Management.

"This has been very common over the last decade or so," he said. "You're hiring the bank to make sure the deal is completed, not to give you a good deal. That is the role of the bank."

Anthem will pay its adviser $5 million up front, while WellPoint will pay its investment bank $2 million to start. They'll pay the rest once the deal goes through.

This form of contingency pay also is common and acts as an incentive for the bank, Rau said. The finance professor saw nothing surprising in the multimillion-dollar figures spread throughout the S-4 statement, especially those attached to executive names.

Schaeffer could pocket $46 million if he retires next July following the merger, according to a "Special Executive Retirement Plan" outlined in the statement.

A dozen WellPoint executives will split $28 million if they stick around for two years following the merger's completion.

If all 12 receive pink slips under certain circumstances, they will divvy up $54 million.

Anthem stock options held by Glasscock and other company executives will become fully vested if the merger happens, and their restricted stock restrictions will lapse, according to the statement.

For the past 15 to 20 years, executives have received more money in the course of big business deals, Rau said, noting that media coverage often overlooks this.

"People take it for granted that if you want to keep top talent, you have to pay them pretty well," he said.

Aside from spending big money on executives, Anthem and WellPoint also assume large risks with the merger. Each company could wind up paying the other $550 million if they terminate the deal, according to the statement. Anthem also plans to incur $3.2 billion in debt to finance cash payments made to WellPoint stockholders and other transaction costs.

The top executives at Anthem and WellPoint had talked informally about a merger for years, according to the S-4 statement, which contains a time line.

Last May, Anthem and WellPoint executives, and their financial advisers, met to discuss general terms. Glasscock and Schaeffer then met in July in Washington, D.C. But shortly afterward, Schaeffer put merger talks on hold while WellPoint completed its Cobalt Corp. purchase.

The day after WellPoint finished that deal, Glasscock called Schaeffer and the two decided to meet Oct. 3. Meanwhile, in late September, the Anthem board had authorized Glasscock to make a proposal for a business combination.

On Oct. 3, Glasscock "proposed a transaction structure in which WellPoint would merge with and into a subsidiary of Anthem," according to the statement.

Anthem spokeswoman Deborah New declined to elaborate on the statement's time line, citing disclosure requirements. But, she said, it was "fair to say that Anthem put the initial deal on the table."

Talks continued throughout October. On Oct. 26, the boards of both companies unanimously approved the deal, according to the statement. They announced it the next day.

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