The Wall Street Journal
NEW YORK — The California Public Employees’ Retirement System will oppose Anthem Inc.’s (ATH) acquisition of WellPoint Health Networks Inc. (WLP), citing hundreds of millions of dollars in potential compensation payments.
The $165 billion fund’s board voted Monday to cast its shares against the merger over what officials called “the egregiously unwarranted pay that would be awarded” to top executives at WellPoint in the event the deal goes through.
State Treasurer Phil Angelides said at a press conference that WellPoint executives could collect pay packages worth more than half a billion dollars, citing new information released from the state’s Department of Managed Health Care.
Angelides and Calpers’ board members present at the press briefing said that they would also rally other investors to vote against the merger. “Calpers will urge other major shareholders to step up and stop this egregious example of CEO pay gone wild,” he said.
The California officials at the press conference said they would ask the department of managed health care to make approval of the merger conditioned on the elimination of the “excessive compensation packages.” Officials at the department couldn’t immediately be reached for comment.
According to a filing with the department obtained through a public records act request by the Foundation for Taxpayer & Consumer Rights, potential cash payments to 293 WellPoint senior executives and others are expected to range from $147.2 million to $356.3 million in cash; the former amount applies if all participants stayed with the merged entity and the latter applies in the event of an involuntary or “constructive” termination within three years.
The company, however, has estimated the cash payments would be $200 million, because a large majority of plan participants are expected to remain with WellPoint, according to the filing, posted on the advocacy group’s Web site.
Employees terminated within three years of the closing would also see the value of their unvested options immediately vest, according to the document. Based on certain stock price assumptions, the total value of unvested options is $251 million. The company indicated that constructive termination includes a requirement that the employee relocate more than 35 miles from his or her current employment location, irking the officials on the call. They said that the proxy was not clear in explaining the potential change-in-control payments.
“It doesn’t pass the smell test,” said Sean Harrigan, president of Calpers’ Board of Administration.
Later Monday, WellPoint released a letter to Angelides from Chief Financial Officer David C. Colby correcting “significant misinformation” and defending the change-in-control provisions. For example, he said that “the severance benefit and stay bonuses,” were part of a compensation package “adopted by the Board of Directors based on independent expert advice, has been in place for years, has been fully disclosed and is consistent with market practice.”
The transaction costs, he said, “will be more than offset” by annual savings of $250 million after two years in reduced administrative expenses and corporate duplication.
As for the accelerated stock options, Colby said it doesn’t consider the potential payouts “new money related to the merger.” Instead, the exercisable shares would have been earned by WellPoint executives over the years, reflected in stock price appreciation.
The transaction is subject to the approval of shareholders of both companies at meetings scheduled for June 28. Calpers, the nation’s largest public pension fund, owns 721,840 shares of WellPoint and 612,938 shares of Anthem as part of its indexed stock holdings.
Anthem signed a definitive agreement to acquire WellPoint in October for $23.80 a share in cash and one Anthem common share for each WellPoint share.
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