Officials trade accusations on CareFirst-Trigon deal

Bonuses overrode price, rejected suitor testified

October 01, 2002|By M. William Salganik and Robert Little | M. William Salganik and Robert Little,SUN STAFF

Trigon Inc. was ready to sweeten its offer for CareFirst BlueCross BlueShield by at least $200 million, but never got the chance because CareFirst officials were too concerned with office locations, job titles and bonuses, according to sworn testimony released yesterday.

In often-accusatory testimony before the Maryland Insurance Administration, one Trigon executive said he told CareFirst's investment banker three times that $1.3 billion "was not our best offer by any means."

The banker's response: "These statements are untrue."

The 872 pages of combative testimony from two top executives of each company offer a revealing glimpse inside the secretive, and now controversial, bid to sell Maryland's largest health insurer, currently nonprofit, to a for-profit corporation.

CareFirst challenged Trigon's account on many key points, and its chief executive, William L. Jews, in sworn testimony, called Trigon's CEO a liar.

Trigon accused CareFirst of worrying more about "social issues" than money. Its chief deal-maker called CareFirst's plan to pay its executives $33.2 million in merger-related bonuses - Jews was to receive $9.1 million - "greedy, stupid and illegal."

"There was no performance whatsoever tied to the payments," testified Timothy P. Nolan, a Trigon senior vice president who tried to negotiate a merger deal with CareFirst. "They were very likely to draw a great deal of public scorn, even in pre-Enron days."

Maryland Insurance Commissioner Steven B. Larsen, who is investigating the deal, said the testimony from spurned Trigon executives raises questions about the integrity of the proposed merger.

CareFirst ultimately rejected Trigon's $1.3 billion offer and accepted another $1.3 billion offer from WellPoint Health Networks Inc. - a California company that agreed to pay the bonuses.

"I remain very concerned about the role merger incentives and severance packages played in the decision-making process," Larsen said yesterday.

The Maryland General Assembly has prohibited the bonuses from being paid, and Larsen could order other severance payments in the deal to be modified or dropped. If CareFirst and WellPoint reject his changes, it could kill the deal.

In transcripts of their depositions before Larsen, which were taken in August but released publicly only yesterday, Trigon executives say they originally planned to offer $1.5 billion in cash and stock for CareFirst. And Trigon Chief Executive Thomas G. Snead Jr. said he was prepared to offer a price "north" of that figure in subsequent negotiations.

But Trigon officials offered $1.3 billion, saying they had determined that CareFirst officials were less interested in the price than the number of seats they would gain on the new company's board of directors.

"We received information that more directors would be better than more money," Snead testified.

Nolan said CareFirst negotiators later "invited" him to improve aspects of the purchase offer - location of the corporate headquarters, Jews' role in the new company, protections if Trigon stock crashed or the deal fell apart - but never the price.

He testified that he told Stuart F. Smith, a Credit Suisse First Boston banker representing CareFirst, that Trigon was ready to talk about offering more money.

"I asked him if he understood that three times, and he confirmed that he did," Nolan said. "He asked, why did I ask that three times, he's not deaf or stupid."

Smith, in an affidavit, denied that such an exchange ever took place.

In testimony Sept. 6 that also was released yesterday, Jews said the suggestion that CareFirst would trade board seats for money was "not only inaccurate but inane."

As for seeking a higher bid, he said, "My staff and I gave Trigon in that instance every opportunity to put ... more money on the table. They chose not to do that."

His testimony prompted a question from Patrick H. Cantilo, a lawyer working for the insurance administration: "When you think you need more money, do you give your policyholders the opportunity to pay a higher premium or do you actually ask them for more money?"

Jews argued that setting health insurance premiums is not comparable to negotiating a price for the company. The price paid for CareFirst is a key issue with legislators and regulators, because the company is a nonprofit and the purchase price would be paid to health-related foundations in the region.

"We assumed the valuation through the regulatory process would index it to a higher number," Jews said. In other words, he was saying that regulators in Maryland, Delaware and the District of Columbia, working with independent consultants, were expected to demand a higher price than the $1.3 million he had negotiated.

The companies offered varying opinions for why the proposed merger fell through.

Trigon said the deal would have cost Maryland fewer than a dozen jobs, but Jews estimated the loss at up to 2,000.

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