Power Struggle Threatens HMO Merger : Acquisitions: WellPoint, Health Systems executives feud over respective roles, pay issues.
When health care executives Leonard D. Schaeffer and Malik M. Hasan announced the marriage of their two companies last April, they spoke enthusiastically of building a national powerhouse that would spread the gospel of managed health care across the country.
Now the two strong-willed executives are locked in a last-minute power struggle that could jeopardize the proposed acquisition by Schaeffer’s WellPoint Health Networks of Hasan’s Health Systems International. One of several significant issues in dispute: who will be in charge of mergers and acquisitions.
While the dispute over the respective roles of Schaeffer and Hasan is a major roadblock, company sources said, the two firms also are squabbling over multimillion-dollar payments to each others’ top management.
“This merger is becoming very bizarre,” said a well-placed source at one company. “It is entering the realm of cultures that don’t match and egos that can’t fit into the room.”
Adds Todd Richter, analyst at Dean Witter Reynolds in New York: “This thing has become a street fight between management of these two organizations. In a street fight, you kick, you scratch, you scream.”
Meantime, consumer advocates and others are fuming at details of lucrative executive pay packages, possibly worth tens of millions of dollars, and investment banking fees that, company sources say, could exceed $30 million.
“That money could buy a lot of care for a lot of people, that’s a lot of well-baby care . . . or lower [insurance] premiums,” said Tom Elkin, a Sacramento health care consultant and former chief of the California Public Employees Retirement System.
Health Systems executives stated in a Nov. 2 letter to officials of WellPoint and its 80%-owner, Blue Cross of California, that WellPoint has proposed stock options worth $36 million to $41 million for a handful of key Blue Cross and WellPoint executives. Health Systems said it was “shocked” to find out the value of the proposed options and accuses Schaeffer of misleading Hasan by telling him that the options would amount to only “a few million dollars.”
The Health Systems letter was part of several internal memoranda and other correspondence between the companies provided to The Times.
“Leonard did not mislead Dr. Hasan,” Patrick Garner, a Blue Cross senior vice president, said in an interview Thursday. He said there is no proposal in the merger agreement dealing with stock options, but declined to give further details.
In a Sept. 21 memorandum to Schaeffer, Hasan also suggests that the WellPoint chairman is trying to renege on the merger agreement, which gave Hasan responsibility for all mergers and acquisitions. Hasan states that he is particularly concerned that he be in charge of the “Blues Initiative,” apparently a code name for the new company’s plans to acquire Blue Cross and Blue Shield plans in other states.
But Garner said that Hasan’s contention is also not accurate, though he declined to say who would be in charge of merger and acquisition duties. “We are not trying to change the written agreement,” he said.
In other correspondence, WellPoint executives said they are opposed to a $2.7-million cash payment that Hasan has sought for signing an employment agreement with the new company. WellPoint says it also objects to a roughly $4-million payment to Michael Gallagher, acting chief executive of Health Net--Health Systems’ health maintenance organization--and Shamrock Investments, an investment bank in which Gallagher is a partner. The payment to Shamrock is described as compensation for “lost opportunity costs” when Gallagher temporarily left his duties at Shamrock to join Health Net on an interim basis. “Those two proposals could not be justified on any reasonable basis,” Garner said.
Meanwhile, sources said that Health Systems, Blue Cross and WellPoint will pay in excess of $30 million to various investment banks that have advised the companies, to special board committees and to the state Department of Corporations. “These are usual and customary fees for such transactions,” said David Olson, a Health Systems spokesman.
Despite the problems, Dean Witter analyst Richter believes the companies “will put these petty issues behind them” and finish the deal, which is facing a Dec. 31 deadline for completing the definitive agreement. If the deadline is not met, the deal would have to be extended, renegotiated or terminated.
