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Potential Anthem-Cigna deal hinges on CEO cooperation

June 23, 2015

Cigna Corp. and Anthem Inc. are poised to do the biggest deal that the health insurance industry has ever seen—if their CEOs can get along.

One of the main sticking points in Anthem’s $47 billion bid for Cigna is differing views on what role David M. Cordani, Cigna’s 49-year-old CEO, would play. Another leadership issue separating the two sides is how many board seats Cigna would get.

Anthem has pounced on Cordani’s unwillingness to step aside as a putting-shareholders-second stance. Cigna says Anthem’s CEO, Joe Swedish, wants to wear more hats than he can handle. Although arguments over which king-of-the-mountain goes where are common in mergers, they’re usually settled before the public gets wind of talks.

Both companies’ stocks have more than doubled in the last two years. Cigna is up 112 percent and Anthem 118 percent as of June 1. Both companies have grown earnings per share. And both are adding customers—Anthem has increased its medical membership by about 13 percent in the five years through Dec. 31, while Cigna boosted its customer base 16 percent.

So is the only difference CEO ego?

“Anthem has decided that Cigna has overplayed its hand and is vulnerable by using a social justification for saying no,” said John Coffee, a professor at Columbia University’s law school. “I understand why the younger guy doesn’t want his career ended by being taken over. But that doesn’t mean there can’t be an arrangement.”

Four jobs

Under an offer made public Saturday, Swedish would take on four positions at the combined firm: chairman, CEO, president and head of the integration team. Cigna has said that Cordani should play a bigger role.

Anthem’s public cash and stock offer—at 29 percent more than Cigna’s average price over the 20 trading sessions before Monday—puts pressure on Cigna’s board to do a deal, after rejecting Anthem on Sunday. Investors are often more interested in a large premium than they are in who takes control.

“At some price, the shareholders are going to be delighted,” said Michael Bernstein, a partner at Baird Capital’s U.S. private equity team who focuses on health care.

Cigna outlined concerns beyond leadership in a letter released Sunday and signed by Cordani and Chairman Isaiah Harris Jr. The company said it has a better track record than Anthem, and criticized it for a data breach disclosed in February that exposed information on 80 million people. It also said that a combination could create antitrust issues. Anthem said none of this is an obstacle to a deal.

Dueling charts

Over Cordani’s tenure as CEO, which began at the start of 2010, the stock has outpaced Anthem’s, rising about 30 percent a year, Cigna pointed out.

Anthem has a chart of its own, though.

The Indianapolis-based company has gained more than 50 percent a year since Swedish became CEO in March 2013, as the company showed shareholders in a presentation on Monday. That’s better than Cigna did over that time period.

Swedish, 64, is a relative newcomer to insurance. Before joining Anthem, he led Trinity Health Corp., which had 47 hospitals in 10 states. He’d previously overseen hospitals for HCA Holdings Inc.

Cordani, who lives in a suburb of Hartford, Connecticut, moved the company headquarters to nearby Bloomfield from Philadelphia in 2011. He’s worked at Cigna almost his entire career. After graduating from Texas A&M University in 1988, he worked for Coopers & Lybrand before joining Cigna in 1991. He earned an MBA from the University of Hartford in 1995.

Marathon battler

Cordani’s a competitive athlete, who’s raced in more than 125 triathlons, according to his company biography. In April, he ran the Boston Marathon as a guide for a wounded veteran. His race results include a listing of a 1-hour-41-minute half-marathon.

If he loses his job in a takeover, Cordani stands to get about $63.4 million in compensation, according to data compiled by Bloomberg. His so-called golden parachute would include $9.95 million in cash severance, early vesting of equity worth $52.3 million at Monday’s close and about $1.07 million in pension and other benefits.

The companies declined to make their CEOs available for this story.

Working out

It may be good for investors that Cigna and Anthem are working out governance ahead of a deal. Publicis Groupe SA and Omnicom Group Inc. called off their $35 billion merger in 2014 almost a year after reaching agreement because they couldn’t settle key management roles. The merger of cement companies Holcim Ltd. and Lafarge SA almost suffered the same fate, before the companies adjusted the price and relegated Lafarge’s CEO to co-chairman of the combined company instead of keeping his post.

David Windley, an analyst at Jefferies Group, said the pattern of offers helps show that Cigna’s main concern is Cordani’s role.

Anthem made four offers for Cigna, starting at $174 a share, according to the letter Swedish sent Cigna. In the third, Cigna holders would have gotten $178 a share, and Cordani would have been named president and chief operating officer. Cigna would have received 6 of the 14 board seats. That wasn’t enough.

“We were stunned that the Cigna board continued to insist on a guaranteed CEO position for Mr. Cordani over choosing to allow its stockholders to realize the significant premium,” Swedish wrote.

The question now is what Cigna does next—perhaps an acquisition of Humana Inc. Cigna has weighed a takeover of its smaller rival, Bloomberg News has reported. A spokesman for Humana didn’t respond to requests for comment.

“Other than saying no and making Anthem go hostile, the other way to turn them away is to become much bigger,” said Les Funtleyder, a portfolio manager at E Squared Asset Management “That would be Humana.”

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