CareFirst allegedly didn't sell itself well

Expert for state says it should have pressed for more money

January 29, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross BlueShield failed to follow a process that guaranteed the best price for the company's sale and thus did not follow Maryland law, a consultant for the state testified yesterday.

As an example, Jay Angoff noted CareFirst's failure to press Trigon Inc., another company bidding for the health insurer in 2001, to raise its offer.

"There was no conceivable benefit of not asking Trigon for more money. That's improper under the law," Angoff told a hearing before the state insurance commissioner.

But CareFirst's lawyers and investment bankers defended the process that led to the proposal to convert the nonprofit health insurer to for-profit operation and sell it to WellPoint Health Systems Inc. for $1.3 billion. WellPoint has since increased its offer to $1.37 billion.

"The board engaged in a bona fide auction process," testified Jay Smith, a lawyer with the firm Piper Rudnick who advised the CareFirst board during negotiations.

He said the board had considered other factors besides price, such as impact on its work force - as it was obligated to do, since Maryland law says the deal must be in the public interest - "but price was not sacrificed."

Smith also testified that CareFirst tried to negotiate a higher price when the deal was revised this month, but that WellPoint said it was not interested in reopening price bargaining at this time.

Yesterday's hearing is among the last to be held before Insurance Commissioner Steven B. Larsen rules next month on whether the conversion and sale is in the public interest. The hearings are scheduled to last through Feb. 5.

If Larsen approves the deal, he could specify a higher price as a condition, and it would be up to WellPoint whether it wanted to pay the higher figure.

Yesterday's hearing coincided with a report issued by consultants to District of Columbia regulators that concluded the company is worth $1.65 billion to $1.75 billion - and that the district should collect 55 percent of that.

Larsen's consultants had suggested the value is about $1.8 billion, and Larsen has said Maryland should get 60 percent. Since CareFirst is a nonprofit, the proceeds from a sale would go to health-related foundations.

The consultants to Washington are Cain Brothers, a New York health-investment banking company. The company is advising the district's corporation counsel (similar to an attorney general, and charged with overseeing the assets of nonprofits) and the Department of Insurance and Securities Regulation.

The Cain report sets the stage for another potential complication in winning approval for a CareFirst-WellPoint deal. Eventually, authorities in Maryland, the District of Columbia and Delaware not only would have to approve the deal, but also must agree on a final price and on how the proceeds would be divided among the jurisdictions.

When Maryland and the district Blue Cross plans joined to form CareFirst in 1998, a study suggested that the state plan brought 63 percent of the assets to the new entity, and Washington 37 percent. Delaware joined later.

Since the affiliation, the district subsidiary has shown greater profitability and membership growth.

If the jurisdictions can't agree on their shares, it would present them with a tricky situation. "It's like a negotiation between sovereign nations," David M. Funk, a regulatory lawyer for CareFirst and WellPoint, commented after the hearing. "There are no ground rules."

CareFirst's efforts to get a higher price from WellPoint, Smith said, came during discussions between the companies this month.

Those discussions ended with a revised deal in which WellPoint offered to pay the full price in cash, rather than cash and stock, and CareFirst dropped a plan to pay executives bonuses for completing the deal.

WellPoint did add $70 million - the "amount of inappropriate compensation" identified earlier by Angoff, Smith said - to the purchase price.

CareFirst suggested that, in the 14 months since the original deal was signed, "the metrics have changed," Smith testified.

However, he continued, Thomas C. Geiser, executive vice president and general counsel for WellPoint, "came back and said, `Jay, we are not prepared to have a full discussion of purchase price.' "

Geiser, who attended yesterday's hearing but did not testify, confirmed Smith's account after the session. He said WellPoint had declined to renegotiate price because it believed, given market conditions, "It was not warranted."

WellPoint's investment banker, Gregory Sorensen of Banc of America Securities, testified before Larsen last month that $1.3 billion was "a fair number. We would call it an aggressive number now, given the changes in the marketplace."

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