M&A

Calpers Protests PacifiCare Severance

Top executives are poised to receive $345 million in merger-related bonuses if United Health's acquisition goes through.
Stephen TaubOctober 18, 2005

The California Public Employees Retirement System (CalPERS) is calling on two health-care companies to trim back $345 million in anticipated bonuses before they complete their merger.

Minnesota-based United Health has agreed to purchase PacifiCare Health Systems for $8.1 billion. Under the deal, top PacifiCare executives are poised to receive $345 million in merger-related bonuses, including $245 million in accelerated stock options; $15 million in change-of-control payments; and $85 million more in cash bonuses and stock if they stay with the merged company.

In addition, PacifiCare chief executive officer Howard Phantsiel would receive $130 million in additional retirement payments as part of an arrangement worked out prior to the merger announcement.

According to the Foundation for Taxpayer and Consumer Rights, the $345 million in bonuses is “enough money to provide health care to 115,000 Californians for an entire year.” PacifiCare spokesman Tyler Mason, however, told the Associated Press that the stock options — awarded between 2000 and 2002 to entice executives to the then-troubled company — will vest this year regardless of whether the company is sold.

CalPERS board members voted 7-4 to urge the two companies to drop the pay package, according to the San Diego Union-Tribune. The board unanimously passed another resolution urging state HMO regulators to call for the executive bonus plan to be abandoned.

This is not the first time that CalPers has opposed a health-care merger because of concerns over severance payouts. In June 2004, the pension
fund argued against the proposed merger of WellPoint Health Networks and Anthem Inc., citing what it deemed excessive pay packages that would be awarded to top WellPoint executives.

CalPERS, which complained that WellPoint executives could potentially receive bonuses, severance payments, and vested stock options totaling more than $600 million, urged other shareholders to oppose the
merger. Despite the pension fund’s best efforts, the deal was approved by shareholders later that month.