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Read Making a Killing

home / healthcare / in the media

The Indianapolis Star
Oct 31, 2003

by JEFF SWIATEK

Merger will mean big bucks for execs;

WellPoint's boss could get $194 million; Anthem's will get much less but do well.
The merger of Anthem Inc. and WellPoint Health Networks stands to enrich top executives of both companies.

WellPoint Chairman and Chief Executive Leonard D. Schaeffer will hit pay dirt when the merger is complete, potentially reaping $194 million. The gain would come from a lucrative "golden parachute," or change-in-control payout, plus the purchase by Anthem of his WellPoint stock.

Schaeffer's take could be much lower than $194 million, however, if the prices of Anthem and WellPoint stock sink between now and the time of the merger. The deal is expected to close in summer 2004, pending regulatory and shareholder approvals.

The two companies on Monday announced their merger to create the nation's largest health benefits company, which will be based in Indianapolis.

Schaeffer's counterpart at Indianapolis-based Anthem, Larry C. Glasscock, won't find the merger nearly as lucrative personally. Anthem has been a public company for only two years, so Glasscock owns relatively few company shares.

Glasscock's stock options that are unvested, or not eligible to be acted on, are for only 200,000 shares at a "strike" price of about $71.75 each, said Anthem spokesman Edward West. The merger benefits Glasscock by moving up the time when he can act on the unvested options to the date the merger takes place. The stock options are now worth about $849,000.

The merger also would give Glasscock up to 18 months earlier ownership of 45,000 Anthem shares that he got under a restricted award, West said. The award grants him ownership of half of the shares in late 2004 and the other half in late 2005.

The coming windfall to Schaeffer, 58, who has worked at California-based WellPoint or its successor for 18 years, is already becoming an issue that could be raised in regulatory hearings on the merger.

"I just see this as Leonard Schaeffer cashing out, which means everyone else pays more (to carry out the merger)," said Jamie Court, president of the Foundation for Taxpayer & Consumer Rights, a nonprofit California consumer group. "I don't see a lot of efficiencies that are going to come out of this merger."

Court said his group, which has fought similar health company mergers in the past and will oppose this one, plans to raise the issue of Schaeffer's potential windfall in regulatory hearings on the merger that may be held in California.

The consumer group calculates the financial gain to Schaeffer as $335 million if the merger goes through.

That number is "without any factual basis and totally incorrect," said WellPoint spokesman Ken Ferber. A number of national newspapers have used a similar number for Schaeffer's potential gain from the merger.

Ferber said those who cite the higher value wrongly assumed Schaeffer's stock options were shares owned outright. Stock options give someone the right to buy company shares for a certain "strike" price set by the company. The owner profits only if the stock rises above the strike price.

Under the merger, Schaeffer will become chairman of the merged company and Glasscock will take the president and chief executive positions. That allows Schaeffer to collect on his $37 million golden parachute.

"We'll honor the provisions" of the golden parachute, Anthem spokesman Edward West said Thursday.

Anthem has no such golden parachute provisions for its executives, which gave Anthem executives an incentive to be the controlling company in the merger.

Under stock prices at the time of the announcement, the deal was worth $16.4 billion and would give Anthem 60 percent control of the merged company's board, although WellPoint shareholders would end up owning about 53 percent of the merged firm's shares.

Other top WellPoint executives also would reap potentially substantial gains from stock sales and golden parachutes.

"It's not unusual for the top five (executives) at least" to benefit from golden parachute severance packages if their company is taken over, said Diane Posnak, managing director of Pearl Meyer & Partners, a New York executive compensation firm.

It's also typical for large, publicly traded companies involved in a merger to accelerate the vesting time of stock options to executives and other employees to the date of the merger, she said.

She said one of the first challenges for the new board of the merged Anthem and WellPoint will be to find ways to give meaningful new incentives to its executives who have reaped big financial gains from the merger.

"It's kind of hard to build incentives when people are suddenly rich with cash," Posnak said.

The deal calls for a $550 million breakup fee, to be paid by either company to the other under certain conditions, if the deal doesn't go through. Anthem must pay the fee if its board withdraws its recommendation for shareholder approval of the merger, West said.

Either side can opt out if the deal doesn't close by the end of November 2004.
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Pay perks by the numbers

$194 million
That's how much Leonard D. Schaeffer, WellPoint's chairman and CEO, could reap once the merger is complete, if the stock prices of Anthem and WellPoint remain unchanged.

$849,000
That's the estimated value of Anthem CEO Larry C. Glasscock's unvested stock options. The head of the Indianapolis-based health benefits company, who would be CEO of the new firm, owns relatively few Anthem shares.
--------------------------------
Larry C. Glasscock
Title: president, chief executive and chairman of Anthem
2002 total compensation: $6,857,839

Anthem unvested stock options held: 200,000 shares worth $849,000 if exercised now at strike price of $71.75. Options, which run to 2012, will all fully vest at the time of the merger.

Anthem restricted stock held: 45,000 shares to be vested in 2004 and 2005. Vesting dates are moved up to time of merger.
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Leonard D. Schaeffer
Title: chairman and chief executive of WellPoint
2002 total compensation: $7.28 million
"Change-in-control" payments after merger: $27.5 million, plus $10 million
toward retirement benefits

WellPoint shares held: 460,000 worth $40 million. They would be exchanged at merger for same number of Anthem shares plus cash premium of $23.80 per share.

WellPoint vested and unvested stock options held: 3.27 million shares worth $127 million if exercised now at strike prices averaging about $46 a share. If held until merger, they would all become fully vested and be converted into Anthem shares.
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Call Star reporter Jeff Swiatek at 1-317-444-6483


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