Merger would bring multimillion dollar windfall to WellPoint CEO

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Health & Medicine Week

The head of WellPoint Health Networks Inc. would be the biggest beneficiary from the proposed merger with Anthem Inc. – a marriage that would boost the value of his company stock by tens of millions of dollars.

The $15 billion cash and stock deal would increase the value of Leonard D. Schaeffer’s nearly 3.27 million shares by $56 million to $330 million, based on the two companies’ share prices before the deal was announced on October 27, 2003.

The merger treats Schaeffer’s shares identically to those of all other WellPoint shareholders, though his gains appear outsized because of his sizable 1.9% stake. However, Schaeffer also is entitled to receive $27.5 million under a change-of-control clause in his contract. That amounts to three times his 2002 salary and benefits of $6.9 million, plus medical and life insurance benefits, said Ken Ferber, a spokesman for Thousand Oaks, California-based WellPoint. The 58-year-old also would see his executive retirement benefits grow by $10 million.

The exact size of Schaeffer’s gain on his shares depends in part on the difference in the companies’ stock prices at the time the merger closes, which the two largest Blue Cross Blue Shield providers expect in the middle of 2004.

Because of the way the deal is structured, with Anthem trading one share of its stock plus $23.80 in cash for each of WellPoint‘s higher-priced shares, Schaeffer’s payout will decline if the difference between the two share prices widens further.

For example, Anthem’s share price dropped on October 27 and 28, and the 20% premium Anthem would have paid using the October 24 closing prices as a benchmark declined to just 3% by October 28. On that basis, Schaeffer’s stock gain from the merger would be just $9.49 million, and the value of his shares nearly $304 million.

Schaeffer’s compensation is drawing criticism from the Foundation for Taxpayers and Consumer Rights. The Santa Monica, California-based nonprofit consumer advocacy group wants state and federal regulators to intervene in the merger.

“Our insurance premiums should not be used to finance golden parachutes for company executives,” said the foundation’s Jerry Flanagan.

Schaeffer would lose his base salary – $1.3 million in 2002 – as well as bonuses and incentives because he will no longer be an executive in the merged company.

Indianapolis, Indiana-based Anthem’s CEO, Larry Glasscock, will head the new company, to be based in Indianapolis and renamed WellPoint Inc., with Schaeffer serving as board chairman.

WellPoint‘s merger with the slightly smaller Anthem would create the nation’s largest managed-care provider with 26 million members from Maine to California. The deal is subject to shareholder and regulatory approval.
This article was prepared by Health & Medicine Week editors from staff and other reports.

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