Why the BCBS-Anthem merger should be blocked

By J. Kevin Murphy

Special to The Capital-Journal

The Anthem proposed purchase of Blue Cross Blue Shield of Kansas (BCBS) should be rejected by the Kansas insurance commissioner because it completely fails to meet the statutory requirement that it be fair and equitable to the 170,000 policyholders. The record in this proceeding reflects the following irrefutable facts:

The BCBS board of directors was duty bound to protect the interests and rights of the policyholders at all times. It did not. Rather, the board of directors and management admit they have conflicts of interest with the policyholders which are reflected, in part, by the change of control compensation increases and paid board memberships on new Anthem-created regional advisory boards that they negotiated for themselves.

The 170,000 policyholders had no legal counsel, no investment banker, no outside auditor and no actuarial firm to advise them. They didn't even have a policyholders committee to have oversight of the transaction. No one ever advised the policyholders about all the jeopardy to their rights in the Anthem/BCBS legal documents, thereby depriving them of full and fair information before they voted on the transaction. Instead, they only received "sales" documents from conflicted Anthem and conflicted BCBS directors and management urging them to vote in favor of the transaction.

Included in the conflicted "sales" documents was the opinion of BCBS' investment banking firm, which was simultaneously serving as an investment banker for Anthem in connection with its initial public offering. Obviously, this overlapping investment banking relationship creates another major conflict with the rights of the policyholders. Talk about the fox in the chicken coop!

The amount of money policyholders are supposed to receive from the sale varies from $321 million to $190 million to $142 million and to less than $50 million (after the excess surplus is dividended to Anthem). BCBS and Anthem refuse to state how much the policyholders will receive and when. Nonetheless, the policyholders were forced to vote yea or nay on Jan. 11, without knowing when or how much they will receive. BCBS documents sometimes claim the policyholders will receive $190 million from the sale of stock to Anthem and $131 million from the excess cash reserves of BCBS. However, the $131 million already belongs to the policyholders as the BCBS owners, and such sum could be paid as a dividend to the policyholders without any sale to Anthem. The $48 million (of the $190 million "purchase price") allocated to an escrow account to cover possible payables to the federal government is unnecessary because the management of BCBS admits that the excess cash reserves of $155 million remaining after the proposed transaction closes is more than twice as much as that required by the Blue Cross Association. Such a large reserve clearly exceeds the $48 million escrow which will obviously be dividended back to Anthem after the closing. This leaves only $142 million being paid by Anthem for all the stock of BCBS, and anyone who believes $142 million is the fair market value of BCBS is not operating with a full deck.

The record is devoid of any expert opinion regarding the fair market value of the stock of BCBS, so the policyholders were left without this important information when they were required to vote.

Anthem, understandably, wants to purchase BCBS for the lowest possible price, but when the BCBS directors hired the same investment bankers used by Anthem and collaborated with Anthem in sending documents to the policyholders urging they accept Anthem's price, rather than obtaining the highest fair market value in a competitive bidding process, it cannot be argued that the transaction is fair and equitable.

The excuses for selling to Anthem are the same worn-out scenarios recited in the past decade by Kansas banks which sold out to the big gorilla from out-of-state. One need only look at the resultant wreckage of hundreds of fired employees and dwindling assets. The remaining local banks are the big winners.

Obviously in order to get the deal approved by policyholders, the BCBS directors created a quorum of only 15 policyholders (out of 172,000 eligible voters) as the minimum number of voters required to sell the company, with only 10 yea votes of the 15 needed for approval. The BCBS directors could get 15 relatives and friends to vote and carry the day for Anthem. Ordinarily, when a stock company like BCBS is for sale, the minimum requirement for approval by stockholders is affirmative votes of two-thirds of all stockholders, not less than one-tenth of 1 percent of them.

The certified results clearly reflect policyholders' dissatisfaction and confusion: 63 percent of the 172,000 eligible policyholders either voted against the sale or did not vote.

The insurance commissioner should protect the 170,000 policyholders and not approve this unfair and inequitable transaction. If the commissioner fails to do so, the policyholders will eventually learn how they were deprived of their rights and take their wrath out on all who allowed it to happen. The policyholders also will learn how their rights were trampled on as they are confronted with substantial premium increases and the transfer of BCBS activities to Indiana, which the BCBS directors/management admit may occur. The innate unfairness of this transaction makes one wonder what else may be uncovered in legal discovery if a policyholders' class action suit is initiated. Rather than subjecting policyholders to such an alternative, the commissioner can set things right by finding the proposed plan and sale are not fair and equitable to the 170,000 policyholders.

J. Kevin Murphy is a retired lawyer/businessman. He graduated from Colgate University and Fordham University Law School, and was former vice chairman and director of Health Systems International, president of Purolator Courier and of Trailways Inc., and an investment banker in New York City.

Copyright 2002
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