ISS, CalPERS at Odds on Anthem-Wellpoint Combo

Despite arguments by the activist CalPERS officials that that executives would be awarded what they called “egregiously unwarranted pay,” Institutional Shareholder Services (ISS) said the salary figures contained in newly released documents likely overstated the actual cost to shareholders, Dow Jones reported.

In concluding that shareholders should back the merger, ISS said in the report that it acknowledged “that shareholders are faced with a difficult choice – vote against an otherwise attractive merger, or ratify by implication the arguably excessive compensation awarded to key executives in the past. At the end of the day, we continue to believe that all of the positive factors of the proposed WellPoint-Anthem combination continue to tip the scales in favor of approving the merger.”

CalPERS and State Treasurer Phil Angelides had urged ISS reconsider its recommendation of the deal. The California officials pressed their case at a news conference earlier this week, in which CalPERS board president Sean Harrigan announced the fund would cast its shares against the merger, citing potential executive payouts of as much as $600 million. CalPERS, the nation’s largest public pension fund, owns 721,840 shares of WellPoint and 612,938 shares of Anthem as part of its indexed stock holdings.

For example, the information, which was part of a filing made to California’s Department of Managed Health Care, showed that payments to 293 WellPoint executives could range from $147.2 million to $356.3 million in cash. The lower figure reflected bonuses that would apply if all participants stayed with the merged entity, and the latter applying in the event of an involuntary or “constructive” termination within three years.

ISS analysts noted that WellPoint and Anthem executives have made public statements that they don’t intend to terminate all the covered executives. Also, much of the merger payout relates to compensation packages that were in place or built up before the deal was signed, according to the report.

ISS also noted that the filing, which was obtained through a public records act request by the Foundation for Taxpayer & Consumer Rights, disclosed that covered executives may be entitled to $251.2 million in stock options that would accelerate upon termination, a figure included in CalPERS’ calculations.

Not only are most executives expected to stay with the company, ISS said, but executives already own their options; because such options vest over a three-year period, it is “practically inevitable” that the options will become exercisable in the near future, regardless of the performance of the company.

Shareholders of both companies will vote on the merger at special meetings scheduled for June 28.