ALL BUSINESS: Greed mires Caremark deal

There is nothing like greed in corporate America.

For the lucky few, it makes them wealthy almost beyond imagination. But it can ruin careers, businesses and in the case of Caremark Rx Inc., possibly even thwart a takeover deal that many on Wall Street think has merit.

That's because the leaders of the pharmacy-benefits manager seem to have put their own interests before those of shareholders. Regulatory filings suggest they got CVS Corp. to promise them all sorts of perks _ big money, job protections and indemnification from legal proceedings _ if they support Caremark's combination with the nation's largest retail drug chain.

Such behavior has given a rival bidder, Express Scripts Inc., some good ammunition to potentially win investor support.

In an era where executive pay and perquisites are under heightened shareholder scrutiny, it is surprising to see what Caremark's leaders deemed appropriate to secure for themselves when negotiating the CVS deal, which the board has unanimously supported.

In November, Woonsocket, R.I.-based CVS announced a stock-for-stock deal, which valued Caremark for $21.2 billion, or about $53 a share. While touted as a "merger of equals," CVS shareholders would get a 54.5 percent stake in the new company while Caremark shareholders would own 45.5 percent.

Faced with a hostile $25 billion cash and stock bid for Caremark from Express Scripts, a Maryland Heights, Mo.-based pharmacy-benefits manager, CVS sweetened its offer on Tuesday. It said it would pay an additional $2-per-share dividend to Caremark shareholders and buy back $5 billion of the combined company's stock, both to come after the deal closes.

The CVS bids have come under fire, not just because they offer no premium to Caremark's market price, but also for what they promise Caremark's executives and directors for their support.

Caremark CEO Edwin "Mac" Crawford would receive $56 million in exit pay, even though he won't be leaving the company since he will become chairman of the combined entity's board. Eleven other Caremark executives were also guaranteed jobs, including Crawford's son, Andrew, who is in senior management at Caremark. An undisclosed number of Caremark's directors would join the board of the new company.

CVS also has agreed to cover any costs arising from alleged stock-option backdating at Caremark. According to the merger agreement, CVS will "indemnify and hold harmless" any present or former officer or director "in respect of acts or omissions" under the law.

Nashville, Tenn.-based Caremark is under investigation by securities regulators for its option granting practices. It also faces a civil lawsuit that alleges options granted to CEO Crawford and others were backdated, allowing them to reap millions of dollars in proceeds when the options were exercised.

The Caremark board also agreed to pay CVS a $675 million cash breakup fee should the company decide against combining with CVS. That potential expense makes it harder for Caremark to walk away from the CVS deal.

"In the sale of a business, negotiations have to be held on behalf of its owners, which are shareholders," said Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware. "The side benefits given to individual officers and directors here raise questions of whether they clouded executive judgment."

The promises made to Caremark executives haven't been lost on shareholders. A class-action lawsuit, led by the Louisiana Municipal Police Employees' Retirement System, accuses Caremark's directors of violating their responsibilities to investors by putting their own interests first and for failing to maximize shareholder value with the CVS deal.

Express Scripts is pouncing on this issue, too _ and making sure it stays in the spotlight. The nation's third-largest pharmacy benefits manager said it would nominate four people to Caremark's 11-member board at its annual meeting in May. It also filed suit to block the CVS deal, attempting to void the breakup fee that Caremark would have to pay CVS.

Both CVS and Caremark have said the lawsuit is without merit. Caremark spokesman Steve Lipin said Friday that the company's focus is to maximize long-term value for its stockholders.

But they may be missing the point. In revising the CVS bid this week, the companies had a chance to fix their wrongs by scaling back the promises made to Caremark's leaders _ a move that would have won goodwill from Caremark's shareholders.

Instead, they have investors furious over a deal that has merits. Many research analysts support the CVS acquisition because it would be a sounder long-term option to hook up Caremark with a major retail drug chain rather than pairing it with a pharmacy-benefit manager half its size.

On Friday, the Securities and Exchange Commission signed off on the proposed CVS buyout, setting up votes by shareholders at the two companies next month despite Express Script's rival bid.

Investors, for now, are voting with their shares. The stock topped $59 a share Friday, above both bids currently on the table. That means shareholders aren't sold on either side.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org