Takeover Prognosis Doubtful

I don’t know if anyone else has noticed, but the two big health insurance companies that have been telling us they can scarcely face the future without undertaking an $18-billion acquisition deal recently turned in pretty good quarterly reports.

Thousand Oaks-based WellPoint Health Networks Inc. reported a rise in profit of 28% for the quarter ended Sept. 30. At its betrothed, Indianapolis-based Anthem Inc., the increase topped 23%.

At both companies, the latest results were in line with what they’ve been doing all year -- knocking out impressive percentage gains in key financial measurements. Expenses are down and share prices are up. Enrollments have risen smartly; at WellPoint the year-over-year figure was better than 4% and at Anthem 8%. And both companies are enthusiastically planning new insurance products.

All of which leads us to ask: What’s the reason for that takeover, again?


Wall Street must be wondering the same thing. One merger-and-acquisition expert told me recently that the pattern of the two companies’ share prices suggests that the market is giving this deal, which is now hung up in the courts, a 50-50 chance of completion.

During WellPoint’s conference call with financial analysts following its latest quarterly report, the company received exactly one question about the transaction. For the most part, the analysts treated the financial results as though its consummation is irrelevant.

Indeed, that has been the fundamental problem with this deal all along: The companies have never made a compelling case for the marriage. They’ve talked about creating “an even stronger organization” and aiming to “better serve our members,” but the only benefit they’ve ever quantified is the savings they’ll gain from merging their computer systems, which they peg at a few hundred million dollars a year. That’s why so many critics see the deal as merely a way for WellPoint’s top executives, who are in line for buyouts and bonuses of up to $600 million, to cash out.

Far be it from me to suggest that thriving companies should never buy one another. There are plenty of reasons they might: to protect against stronger competitors, for example, or gain economies of scale or exploit possible synergies.

Do any of these apply in this case? WellPoint and Anthem executives say they do, but as both enterprises are already 800-pound gorillas in healthcare, creating a 1,600-pound gorilla out of them doesn’t produce much competitive clout or operational efficiency that they don’t already have.

And for all they have preached as gospel the importance of having a nationwide footprint, the recent legal travails tripping up this deal show that for multi-state companies in a heavily regulated industry, the government kibitzing comes from all sides.

The problems started when California Insurance Commissioner John Garamendi rejected the deal last July on grounds that WellPoint’s California customers could be harmed by the huge severance and bonus handouts to company executives, as well as by the burden of billions of dollars in other transaction costs. (Anthem is suing to overturn Garamendi’s decision, but the first court hearing isn’t scheduled until Feb. 25.)

The Georgia insurance commissioner subsequently suspended his previously granted approval, concerned that the deal he reviewed might be significantly altered by WellPoint’s pledge to invest $100 million in care for rural and underserved California communities -- the price of approval from the California Department of Managed Health Care, another regulator. He informed the companies in writing that they would have to clear any changes with him before they could complete the purchase.


Meanwhile, the Texas insurance commissioner’s approval of the transaction expires Dec. 31, and his spokesman says the companies will probably have to seek an extension.

In Missouri, regulators are rattled by the local Anthem subsidiary’s request to pay an extraordinary $10-million dividend to its parent. They suspect the money might be used to help finance the deal, even though Anthem had assured the state that the transaction costs would be easily covered by the ordinary dividends the local unit pays out to corporate headquarters every year. (This year, that sum is $367,000.) The state has one more week to decide whether to approve the dividend.

Some investors are peeved that the companies haven’t been entirely forthright about the regulatory landscape. At least one big WellPoint holder thinks the company should have specifically informed the public that it had received the order from Georgia amending its approval. (WellPoint says that it was always understood that all state regulators would take one last look at the deal before ultimately signing off, and adds that it didn’t disclose it to investors because it was available from public sources to anyone who bothered to look.)

More than a year has passed since the companies introduced their deal as a new vision in healthcare. After Nov. 30, however, either can bail out. WellPoint Chief Executive Leonard Schaeffer said during the last conference call that the provision means “it’s incumbent on both organizations to go back and take a close look as to whether we want to continue.” He added for the record that WellPoint still considers the deal “strategically ... the most appropriate thing for either of us to do.” Anthem issued a similar statement.


But neither side seems to be promoting the deal with the same enthusiasm they had at the beginning. One wonders if they haven’t started to come around to their critics’ view: For all its hassles, this deal isn’t worth it.


Golden State appears every Monday and Thursday. You

can reach Michael Hiltzik at and read his previous columns at