Two deals create giant health insurers

Anthem will be largest U.S. company in industry

October 28, 2003|By Dan Thanh Dang and M. William Salganik | Dan Thanh Dang and M. William Salganik,SUN STAFF

Consolidation of the nation's health care insurance industry took a major step forward yesterday with the announcement of two deals that will not only produce two of the country's largest insurers, but could also push smaller regional companies toward similar mega-mergers as they fight to stay competitive.

In the bigger deal, WellPoint Health Networks Inc. - the giant California insurer that tried recently to buy Maryland's CareFirst BlueCross BlueShield - will be bought by smaller Anthem Inc., based in Indianapolis, for $16.4 billion in cash and stock.

The merger will create the nation's largest health insurer with $27.1 billion in assets, 40,000 employees and 26 million customers in 13 states. The combined company will keep Anthem's headquarters in Indiana but take WellPoint's name.

In the second deal, Maryland-based Mid Atlantic Medical Services Inc. will be purchased by UnitedHealth Group Inc. of Minnesota for $2.95 billion. That agreement will add 2 million customers to United's client base. United officials said they will keep MAMSI's Rockville headquarters and management team in place.

Industry experts said regional companies merging into larger national insurers is a tactic to battle the rising costs of medical care, keep premiums at reasonable levels and raise profits.

With a poor economy, work force reductions and a shrinking pool of people with health care benefits, the struggle to be competitive gets harder every year, experts said.

"The insurance industry is still ripe for further consolidation," said Scott Keller, president of DealAnalytics.com.

"Given the fact that the major players are consolidating, it will put pressure on smaller regionals to consolidate to get up to scale," Keller said. "Plus, when you see a significant transaction in any industry, that gives courage to other companies that may have been on the fence to do an acquisition, to follow in the footsteps of major market leaders.

"These companies don't do deals to lose money," Keller said. "You're going to hear so much proselytizing from the CEOs on how synergies will allow lower costs and that it will be a good thing for consumers. But the other side of the argument is that in the longer term, they'll be large enough to almost dictate pricing and possibly squeeze their competitors out of the market."

Shares of WellPoint climbed $7.16, or 8.5 percent yesterday to close at $91.09 on the New York Stock Exchange. MAMSI's stock jumped 10.7 percent to close at $59.62, up $5.74.

MAMSI executives will be among the beneficiaries. At the end of 2002, MAMSI Chairman Mark Groban had more than a million shares of stock and options to buy hundreds of thousands more. At yesterday's closing price, the deal would bring Groban well over $60 million

Anthem's stock fell $6.21 to close at $71.05, and UnitedHealth's dropped $1.85 to close at $52.40.

Under the terms of the Anthem-WellPoint agreement, Anthem will pay $23.80 in cash and one share of Anthem stock for each share of WellPoint stock owned. The transaction, which is expected to modestly dilute 2004 earnings per share, will likely close in the middle of next year.

Executives of the companies said they expected efficiencies from their combination to generate $250 million in annual savings by 2006.

Both WellPoint and Anthem started from roots in state Blue Cross plans and grew by buying other Blues and some non-Blues insurers as well.

WellPoint was originally Blue Cross of California, and became the first Blues plan to convert to for-profit operation in the mid-1990s. Over the past few years, it acquired converted Blues companies in Georgia, Missouri and Wisconsin, but was blocked in its efforts to buy CareFirst in Maryland.

Anthem began in Indiana and picked up a number of smaller Blues plans, which were often struggling financially. It converted from a mutual plan, which is owned by its policyholders, to a for-profit company traded on Wall Street. It bought another for-profit Blues plan recently, Virginia's Trigon, bringing its total number of Blues plans to nine.

The Anthem-WellPoint combination "makes sense on multiple levels," Matthew Borsch, an analyst with Goldman Sachs Group Inc., said in a research note yesterday.

"The merger brings together two of the industry's leading management teams and technology infrastructures and creates a `mega-Blue' with No. 1 market share in 12 of 13 Blue states and close to 25 percent of the 89 million systemwide Blue Cross Blue Shield members in the United States.

"With the recent slowdown in Blues [mergers and acquisitions], the timing is good in that near-term both companies will be free to focus on integration," Borsch said. "The managed care mergers of [the] 1990s often failed because the integration task was far more complex than estimated. ... We see minimal risk to this merger."

In the UnitedHealth-MAMSI deal, MAMSI investors will receive $18 in cash and a 0.82 UnitedHealth share for each MAMSI share owned.

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