Leak May Have Killed WellPoint's Aetna Takeover Bid.

Within hours after WellPoint Health Networks Inc. launched a $10 billion bid to acquire Aetna Inc., details of the Thousand Oaks company's Feb. 24 letter of interest were leaked to the media.

Officials at WellPoint knew the leak didn't bode well for the deal.

They had hoped to get in for a look at Aetna's books before refining their offer. But once the overture became public, Aetna faced the potential embarrassment of letting WellPoint look at its books only to have the competitor lower its estimate of the company's worth or walk away from the deal.

"We were all huddled together the night it happened, and there was a lot of shoulder shrugging (over who leaked the letter)," said one source close to the deal. "It's just about impossible to sit and guess who it was."

Whomever the source of the, leak, it appeared as of late last week that WellPoint's bold move to acquire the nation's largest health insurer was dead. WellPoint officials say they plan to make no further offers.

"In the words of our CEO (Leonard Schaeffer), it's back to minding our own business," said Ken Ferber, a company spokesman, adding that there are plans to attempt a hostile takeover.

WellPoint had teamed up with ING America Insurance Holdings Inc. to offer $70 a share for Aetna, which had seen its share price tumble to $40 in recent weeks after fourth-quarter 1999 earnings revealed signs of trouble in its health-care division.

WellPoint had hoped to add Aetna's 21 million health care customers to the 7.3 million medical and 32 million specialty members of its Blue Cross of California and Unicare national health care products.

ING America, a unit of Dutch financial concern ING Gronp NV, was interested in acquiring Aetna's financial services division. However, Aetna's board rejected the unsolicited overture March 12.

Chairman's response

Aetna Chairman William Donaldson announced that the company would split in two, creating publicly traded financial services and health care companies.

"Our goal is to enhance shareholder value, and to improve the quality of our services and relationships with all our constituencies," Donaldson said in a statement. "We believe this can best be accomplished by separating into two businesses."

Shares of Aetna stock, which had jumped from $41 to $61 after the overture became public, promptly gave up $6 on the release of Donaldson's statement.

Meanwhile, WellPoint had been trading at around $70, but the stock lost about $10 following the leak.

During a March 13 conference call with investors and analysts, Donaldson maintained that the ING/WellPoint letter understated the value of Aetna, but he came under fire from investors and some analysts who wanted to see the company take the money.

"Aetna obviously wants to turn itself around by itself," said Kenneth Abramowitz, an analyst with Sanford C. Bernstein. "No one will know whether it was a smart move until about a year from today when the company has or hasn't turned itself around."

In their letter of interest, WellPoint and ING proposed paying $70 a share for Aetna, about in cash and $26 in WellPoint common stock. WellPoint's executives said the bid was based on publicly available information and that they were prepared to negotiate adjustments in the offer based on a closer look at Aetna's books.

Abramowitz said he saw WellPoint's offer as being too conditional. He suspects Aetna leaked details of the deal because the company wasn't interested in the proposal. "I don't think Aetna feels like entertaining acquisition offers," said.

David Carter, an Aetna spokesman, would only say, "I have no comment on where that (leak) came from."

Analyst's perspective

Joseph France, an analyst with Credit Suisse First Boston, said it wouldn't make sense for Aetna to leak the letter. Officials would have known that by releasing details of the overture, they would have come under significant pressure to show how they planned to turn the company around if they weren't willing to accept an offer that was nearly twice what the company's stock had been trading for.

"I don't see either party (Aetna or WellPoint) having much to gain (from releasing the letter)," said France.

It was France's reading of Donaldson's conference call that Aetna isn't closing the door completely to selling off its health care operation. "They didn't really say anything that would preclude a more formal, higher offer," he said.

At the same time, it would be a big surprise to France and other analysts if that offer were to come from WellPoint. "I don't think they have any intention of getting into a bidding war," said France. "They tend to be more cautious. They're careful to crunch the numbers and focus on the returns. They have a history of looking at things and walking away (if the numbers don't pencil out)."

Nor is it likely that WellPoint would attempt a hostile takeover. That would preclude the company from getting a look at Aetna's books.

"You wouldn't want to get into any deal without having a chance to do your due diligence," said one WellPoint executive, who asked not to be named.

All in all, WellPoint's move on its biggest competitor demonstrated to Wall Street that the Thousand Oaks firm is gutsy, if nothing else, said France. "It also shows WellPoint is willing to think outside the box," he concluded.