By Liz Hoffman and Anna Wilde Mathews
Quarrels have broken out behind the scenes of Anthem Inc.'s $48
billion proposed acquisition of Cigna Corp. as the health insurers
seek regulatory approval for their landmark deal, according to a
series of letters reviewed by The Wall Street Journal.
People on both sides say the squabbles could delay or derail
antitrust approvals, which are typically harder to obtain if both
parties aren't in sync. While neither company has sought to
terminate the merger, the people say -- and it doesn't appear in
danger of imminent collapse -- Anthem and Cigna are bickering on
several fronts.
Among other things, the companies have privately accused each
other of violating their July merger agreement and fumbling
submissions to regulators.
The discord shows how corporate marriages -- which must navigate
choppy markets and exacting regulators -- can also be vulnerable
from within, as disagreements fuel resentment and lines of
communication fray.
A key point of contention is Anthem's lawsuit against Express
Scripts Holding Co., a major middleman for prescription drugs. The
March complaint accuses Express Scripts of overcharging Anthem for
drugs and seeks about $15 billion in damages.
Cigna Chairman Isaiah Harris Jr., in an April 9 letter to
Anthem's board, said the suit could hurt the prospects for
regulatory approval and the combined company's value. Anthem
responded to Cigna's board that it had alerted Cigna to the
possibility of a lawsuit early in their merger talks, and that
squeezing better prices from Express Scripts can only be
beneficial.
During a heated exchange over the litigation, Anthem General
Counsel Tom Zielinski wrote on May 5 to his Cigna counterpart,
Nicole Jones, that he did "not intend to correspond further" about
it.
Ms. Jones, who traded several letters with Mr. Zielinski,
responded: "Suffice it to say that we disagree with just about
every characterization and assertion that you make with respect to
the matters raised in your letters -- other than your suggestion
not to continue a correspondence."
Spokespeople for both companies declined to comment.
Simmering in the background are tensions about the future role
of Cigna Chief Executive David Cordani. In January, Anthem offered
Mr. Cordani oversight over some, but not all, of the combined
company's three business segments, according to the letters. Mr.
Cordani pushed back, and Anthem relented, giving him oversight over
all three.
Mr. Cordani and Anthem CEO Joseph R. Swedish have locked horns
in the 10 months since the deal was struck, people familiar with
the matter say. Mr. Swedish, a 64-year-old fly-fishing enthusiast,
spent his career in the hospital business, leading a large
nonprofit system before becoming Anthem CEO in 2013. Mr. Cordani, a
50-year-old competitive triathlete, is a managed-care veteran who
has run Cigna since 2009.
People familiar with the matter say Cigna is also unnerved by
some senior-level departures at Anthem over the past several
months. These include the resignation of Chief Financial Officer
Wayne DeVeydt, announced in early May, which surprised the market,
sending shares down 2%. Anthem said at the time that Mr. DeVeydt,
who had been finance chief since 2007, was leaving to spend more
time with his family and various philanthropies.
However, Cigna didn't raise its concerns about executive
departures to Anthem, according to a person with knowledge of the
matter.
If completed, the deal would create the largest U.S. health
insurer by members, with more than 54 million, and $117 billion in
annual revenue. It was announced during a wave of tie-ups,
including Aetna Inc.'s pending $34 billion purchase of Humana Inc.,
aimed at gaining scale and efficiency as the U.S. health-care
landscape shifts.
The letters between Mr. Zielinski and Ms. Jones -- which may not
represent a complete picture of the current state of the
relationship between the companies -- reveal worry that the
acquisition is slipping behind the Aetna-Humana deal in the
regulatory-review process. Antitrust officials have been
aggressively swatting down mergers lately, and Anthem's takeover of
Cigna is thought to have better odds if reviewed alongside
Aetna-Humana.
In the letters, Anthem accused Cigna of missing Justice
Department deadlines and submitting data in the wrong format,
pushing the expected date for a yes-or-no ruling to early July.
Anthem's Mr. Zielinski complained Cigna was taking too long to
approve documents that lay out the deal's benefits, resulting in a
missed deadline for one such submission.
Ms. Jones replied that "the flaws in the Anthem draft white
papers are too numerous to catalogue fully."
Cigna said Anthem has been slow to formulate a backup plan if
regulators require divestitures or sue to block the deal.
"Everything we are hearing indicates that Aetna and Humana have
been engaging with DOJ on the divestiture process for some time,"
Ms. Jones wrote. "A remedial process for our transaction very well
may take longer and it appears we already are likely months behind
Aetna/Humana."
Cigna told investors this month that the deal might not close
until next year, rather than in late 2016. Anthem quickly
reiterated the original timeline and in a private letter that day
to Ms. Jones, Mr. Zielinski accused Cigna of trying to "spook the
market."
Cigna shares are trading about 25% below the offer price, an
unusually wide gap indicating investors fear the takeover could
collapse.
Anthem has accused Cigna of holding back information about its
business, suggesting in one letter that Cigna is awaiting a
"clearer signal" that regulators would sign off before sharing
sensitive details with a company that is still a competitor.
Anthem said it needs more information about Cigna's cost-of-care
and salary expenses, among other items, to calculate savings that
could be wrung from the deal. Because those savings could be passed
on to customers, they are key to convincing regulators the deal is
pro-competition.
"Cigna's tardiness, data formatting issues and midcourse
changes...[have] been highly disruptive and demotivating," Mr.
Zielinski wrote to Ms. Jones.
In its letters, Cigna laid the blame for the delays at Anthem's
feet and called Anthem's insistence on more details a "red
herring."
The companies' courtship was tumultuous from the beginning,
according to regulatory filings. For weeks last June and July, the
companies sparred over the price, the mix of cash and stock to be
paid to Cigna shareholders, and who would run the combined
company.
Weeks of negotiations produced an uneasy agreement. Mr. Swedish
would be CEO and step aside in two years, with no firm commitment
that the job would go to Mr. Cordani, who would be president and
chief operating officer.
Anthem's Blue Cross Blue Shield affiliation adds wrinkles to the
integration process, a task that would be complicated under normal
circumstances. To keep its licenses, the combined company must get
two-thirds of its national plan revenue from Blue-branded business
and 80% in the 14 states in which Anthem currently operates under
the Blue banner. That tees up the type of nitty-gritty planning
that can be made more difficult by internal tensions.
Anthem has said it has two years after the transaction closes to
comply with the Blue rules, and it views them as "very
manageable."
The deal is the latest among a spate of planned megamergers --
including the proposed combination of pipeline operators Energy
Transfer Equity LP and Williams Cos. -- to run into difficulty
between signing and closing.
Should the deal fail to go through, Anthem and Cigna could face
other challenges. They would remain smaller than UnitedHealth Group
Inc., the industry's biggest player, and potentially contend with a
bulked-up Aetna-Humana.
Speaking to employees last year about the deal's rationale, Mr.
Swedish said he hadn't wanted Anthem to end up an also-ran. The
merger, he said, guaranteed Anthem would be "a survivor, a
competitor."
Cigna could collect a $1.85 billion breakup fee from Anthem if
the deal fails on antitrust grounds. Goldman Sachs Group analysts
recently estimated that with that fee in hand, an independent Cigna
could deploy $9.2 billion for acquisitions, share buybacks or
dividends.
Write to Liz Hoffman at liz.hoffman@wsj.com and Anna Wilde
Mathews at anna.mathews@wsj.com
(END) Dow Jones Newswires
May 23, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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