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Angelides Denounces Bid to Buy PacifiCare

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Times Staff Writer

State Treasurer Phil Angelides and the California Medical Assn. on Thursday criticized the proposed purchase of Cypress-based insurer PacifiCare Health Systems Inc., calling $315 million in payouts to top executives excessive.

One day before a Sacramento public hearing on the proposed $8.1-billion deal with Minnetonka, Minn.-based UnitedHealth Group Inc., Angelides also asked the administration of Gov. Arnold Schwarzenegger and the state’s two big public employee pension systems to use their clout as investors in both companies to oppose the deal if the payments were not rescinded.

“There is simply no justification for these excessive payouts -- which will go to the very same HMO executives who engineered this merger,” Angelides said in a letter to Schwarzenegger.

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In addition to Angelides, who is running for governor, some large institutional investors contacted Thursday said they were concerned about the executive payments, calling them detrimental to shareholders.

And the California Medical Assn., which represents the state’s doctors, issued a statement Thursday that reiterated its criticism of the deal. The group asked for a “careful examination of the fairness” of the proposed executive compensation.

“Once again, we see another mega-merger before us where the emphasis appears to be on profits on Wall Street instead of healthcare on Main Street,” association Chief Executive Jack Lewin said.

In government filings after the deal was announced in July, PacifiCare said its top executives would earn nearly $230 million if it was acquired by UnitedHealth by Feb. 1, with most of that money coming through accelerated vesting of now-lucrative stock options granted by the company. About $85 million more would come in the form of cash and other bonuses to get executives to remain with the combined company.

PacifiCare executives contend that the compensation is well within industry standards.

“The majority of these stock options would vest with or without the merger,” company spokesman Tyler Mason said. “This is compensation awarded to people who turned this company around.”

PacifiCare has pointed out that Chief Executive Howard Phanstiel is not getting a “change-of-control” bonus that executives received in last year’s much-criticized acquisition of Thousand Oaks-based WellPoint Health Networks Inc. by Indianapolis-based Anthem Inc.

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The company also has said Phanstiel’s compensation is mostly from stock options he was granted for helping to turn around the company, which was close to filing for bankruptcy protection when he was hired.

But Angelides argues that the deal should not allow PacifiCare executives to exercise their stock options any sooner than they would have been able to without the acquisition. He also contends that any bonuses should be tied to long-term performance of the combined company.

Angelides, who built a personal fortune as a developer, has some allies among labor-oriented institutional investors and advocates of corporate governance reform.

“It’s double-dipping,” said Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees.

“These are the payouts that Wall Street demands, but institutional shareholders are seeking a change. We are no longer sitting on our hands,” Ferlauto said.

The PacifiCare acquisition still has not received state regulatory or shareholder approval, and the company has yet to file its proxy with the Securities and Exchange Commission detailing final numbers.

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The California Department of Managed Health Care is holding a hearing today in Sacramento to debate the deal.

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