Health Giants’ Deal Off : Its Demise Puts Future of Two Charities in Question
After trading accusations of greed, power grabbing and deception for weeks, the proposed merger of health-care giants WellPoint Health Networks and Health Systems International quietly collapsed Thursday, imperiling funding for two huge California health-care charities.
The demise of the deal puts in question the future of the charities, which were to be formed as part of the merger of the two Woodland Hills-based firms specializing in managed health care. Health-care officials in Los Angeles County and elsewhere were counting on the $3.3-billion charitable fund to pick up some of the slack from budget shortfalls that are endangering public health programs statewide.
The merger, announced in March, started out friendly and was applauded by Wall Street analysts as a powerful combination of two complementary companies that would create the nation’s fifth-largest health insurer. But the companies’ enthusiasm for the deal eventually dissolved into accusations, distrust and a spate of leaks to news reporters of confidential company correspondence.
The two companies held a mediation session Wednesday to try to resolve their differences. But a day later, they issued a terse joint statement saying mediation had failed and that they were now in talks to end the merger “and release all claims against one another.” The latter reference suggests the companies may be trying to waive a $50-million breakup fee that was to be paid by whichever company terminated the deal.
Representatives of Health Systems and WellPoint--whose headquarters are across the street from each other--said they would have no further comment until the discussions concluded.
At the heart of the dispute, people close to the situation say, was a clash of egos between two strong-willed chief executives: WellPoint’s Leonard D. Schaeffer and Health Systems’ Malik M. Hasan, two of the managed-care industry’s best-known executives. The personal relationship between Hasan and Schaeffer soured as disputes arose over the interpretation of key provisions in the merger agreement involving management roles and senior executive compensation, sources said.
That personal dispute prompted sharp criticism by shareholders, consumer advocates and state officials.
“This was something that should have been worked out between the parties,” said John Van de Kamp, a former state attorney general who now represents the California Wellness Foundation, a health-care charity that is Health Systems’ biggest shareholder, although a nonvoting one. “The major loser in this situation is the public interest.”
Harry Snyder, co-director of Consumers Union’s San Francisco office, said he was “dismayed that these two CEOs were allowed to run roughshod over a merger that would have benefited both their organizations and the foundations.”
The breakup of the deal is almost certain to prompt a rash of lawsuits by shareholders and the companies. One of the most contentious issues will be the charitable foundations that were an integral part of the deal.
Under the WellPoint-Health Systems merger, Blue Cross of California was to have converted from nonprofit to for-profit status. California law requires nonprofit companies that become for-profit ones to create charitable foundations equal to the value of their assets to compensate the public for years of tax-exempt status.
WellPoint became a for-profit business when Blue Cross sold a 20% stake to the public in 1993.
Thus, under a conversion plan approved by the California Department of Corporations after two years of discussions, Blue Cross and WellPoint were to have formed two charities with $1 billion in cash and shares in the new company with an approximate value of $2.3 billion.
The collapse of the deal does not end Blue Cross’ obligation to compensate California taxpayers, Corporations Commissioner Gary Mendoza said Thursday.
“If the merger is not consummated, [Blue Cross’] responsibilities will remain unmet,” Mendoza said. He said he would ask Blue Cross to “promptly” submit an alternative proposal for funding the charities. It was unclear how quickly that could be accomplished.
Meanwhile, Assemblyman Phillip Isenberg (D-Sacramento), chairman of the Assembly Judiciary Committee, has asked state Atty. Gen. Dan Lungren and Mendoza to sue the companies if necessary to recover the full $3.3 billion from Blue Cross.
“The notion that a charitable foundation is set aside because these guys are arguing over who is the alpha bull and who gets the most money is preposterous,” Isenberg said.
Several Los Angeles health-care clinics had been counting on getting funding from that foundation, said E. Richard Brown, a professor at UCLA’s Center for Health Policy Research.
“A lot of people wanted to see the new Blue Cross foundation put money into helping community clinics and nonprofit hospitals take over some of L.A. County’s health clinics because the county has no money,” Brown said.
Signs of trouble in the deal surfaced publicly in early November when the companies disclosed that unresolved issues might prevent the deal from closing by its Dec. 31 deadline.
That was followed by a string of accusations from Health Systems that WellPoint and Schaeffer had violated the merger agreement by reneging on terms dealing with Hasan’s management role in the company, particularly his role in future mergers and acquisitions. Health Systems also accused WellPoint of attempting to stack the board of the new company with individuals with close personal or business ties to Schaeffer.
That prompted WellPoint to make a similar charge against Health Systems a week ago, when it accused Health Systems of trying to stack the new board with its people, including investment banker Jay Gellert, who stood to receive a $4-million fee from the transaction.
The $1.6-billion acquisition by WellPoint would have created a national powerhouse in managed health care, with $6 billion in revenue and more than 4.4 million members. In California, it also would have created a powerful rival for the giant Kaiser Foundation Health Plan.
In the aftermath of the scuttled merger, analysts said they expect the health plans to continue their expansion plans.
“Together, their strategy was going to be primarily purchasing Blue Cross and Blue Shield association health plans across the country--and I think they will continue to pursue that separately,” said Mike Elwood of Volpe, Welty & Co.
Health Systems is the corporate parent of Health Net, one of the nation’s largest health maintenance organizations. WellPoint, 80% of which is owned by Blue Cross of California, operates the CaliforniaCare HMO and other health plans.
Bloomberg Business News and Associated Press contributed to this report.
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Death of a Merger
* March 8: WellPoint Health Networks and Health Systems International enter into merger discussions.
* March 31: On the eve of the official announcement of a merger between the two companies, Health Systems Chairman Roger Greaves resigns over his role in the new firm.
* April 3: WellPoint confirms its plan to buy Health Systems in a stock swap valued at the time at $1.89 billion. The new company, to be called Unicare, will have 4.4 million members and a combined revenue of $5.4 billion. The agreement comes after directors of Blue Cross of California--which owns 80% of WellPoint--reject an offer by Blue Shield of California to buy WellPoint for $4.8 billion.
* Sept. 8: State Department of Corporations Commissioner Gary Mendoza approves the merger and a related plan by Blue Cross to establish a $3.2-billion charity to fund health programs statewide. The insurer is required to form the foundation as part of its conversion from a nonprofit to a for-profit company.
* Nov. 9: Mendoza, following a disclosure by company officials that a power struggle threatens to derail the merger, sends a scolding letter to the insurers saying there is “no legitimate reason” for delaying the deal.
* Nov. 28: In an attempt to increase the pressure on WellPoint, Health Systems Chairman Malik M. Hasan, who owns 19% of his firm’s stock, announces he and other major Health Systems shareholders will no longer back the proposed acquisition.
* Dec. 1: Health Systems says WellPoint has violated the terms of the merger agreement, adding that it objects to the nomination of individuals with personal ties to WellPoint Chairman Leonard Schaeffer to the board of the new company.
* Dec. 8: WellPoint strikes back at myriad accusations by Health Systems in a 15-page letter contending that Health Systems has tried to scuttle the plan and has demanded changes in the agreement intended to enhance Hasan’s role in the new company.
* Dec. 14: Just a day into mediation efforts initiated to resolve their differences, WellPoint and Health Systems declare that what would have been one of the largest health-care mergers ever is dead.
Source: Times reports. Researched by JENNIFER OLDHAM / Los Angeles Times
