WELLPOINT-ANTHEM MERGER MARKS BIRTH OF MEGA-HMO.

Byline: Evan Pondel Staff Writer

THOUSAND OAKS - WellPoint Health Networks Inc. was bought Monday by Anthem Inc., a smaller Blue Cross Blue Shield health-plan provider based in Indianapolis, in a $16.4 billion deal that creates the nation's largest managed-care company.

The new company, covering nearly 26 million people and operating in 13 states, will be called WellPoint Inc. and will be based in Indianapolis.

The merger will lead to ``minimal staff reductions'' at WellPoint's Thousand Oaks headquarters, according to a company statement. The transaction will not affect the operations of its Warner Center-based subsidiary, Blue Cross of California.

``Two of the big consolidators are consolidating. And many other companies are probably going to go in a similar direction,'' said Thomas Carroll, analyst with Legg Mason in Georgia. ``I think it might be a stretch to say this transaction puts us closer to some universal health plan ... but this is certainly creating a large company.''

Under the terms of the deal, WellPoint shareholders will receive $23.80 in cash and one share of Anthem stock for each WellPoint share. Pending shareholders' and regulatory approvals, the transaction is expected to close by mid-2004.

WellPoint rose $7.16, or 8.5 percent, to close at $91.09, while Anthem shares declined $6.21, or 8 percent, to close at $71.05 Monday, with both stocks trading on the New York Stock Exchange. The value of the deal has slipped to about $14.2 billion since Monday morning.

Leonard Schaeffer, chairman and chief executive officer of WellPoint, is expected to serve as the newly formed company's chairman of the board. Larry Glasscock, Anthem's chairman, is poised to retain his current roles as president and chief executive officer.

At a time when health-care companies are swelling with profits, consolidation has become a key tactic to help reduce costs and competition. The combination of two mammoth companies like Anthem and WellPoint highlights an overall trend for the industry as partnerships are preferred over fierce corporate takeovers. Classified as a merger by WellPoint and Anthem, their move probably foreshadows a string of similar transactions over the next two years, analysts say.

WellPoint and Anthem share certain characteristics, most notably their reputations for acquiring Blue Cross-Blue Shield plans throughout the country. The plans are enticing because they are generally less expensive to purchase, and already have a pool of loyal medical members.

The ``Blues'' have evolved since their inception almost 70 years ago, dropping their nonprofit status to become public companies. That evolution has provided them with greater access to capital, while enhancing the market breadth of companies like Anthem and WellPoint. The two companies are part of a federation of 42 independent, locally operated Blue plans that belong to an association.

``This strategic merger ... is a testament to the value and strength of the Blue Cross-Blue Shield brand,'' Glasscock, 54, said in a statement. ``The combined company will continue to build on those traditions in the communities where we live and work.''

Anthem operates in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia. WellPoint has operations in California, Georgia, Missouri and Wisconsin.

Analysts said the deal bodes well for WellPoint shareholders, but could pose some logistical problems for the companies. Anthem and WellPoint have extensive claims-processing technologies that might be difficult to coordinate should they combine, said Adam Miller, analyst with Williams Capital Group in New York.

``In the long term, the deal is positive; however, both companies are going to have to focus on economic efficiencies and the costs to administer claims.''

WellPoint Chief Executive Schaeffer said he welcomes the challenge.

``Advancing medical technology, the Baby Boomer generation and expanding consumer expectations continue to strain the American health-care system,'' Schaeffer, 57, said Monday during a conference call. ``We want to take the lead in addressing these challenges.''

For consumers, double-digit increases in premiums continue to create the biggest burden. Though the WellPoint/Anthem deal could improve investors' standing, industry experts say it probably will not improve the cost of health care for consumers.

``Having multiple plans to choose from is generally an advantage for consumers out there,'' said John Kralewski, a professor of public health at the University of Minnesota, Twin Cities.

And the more consolidation in the industry, the fewer opportunities for consumers to find better prices, Kralewski said.

Both companies have already proved their ability to manage their own finances effectively. WellPoint posted third-quarter profits Monday of $246 million, or $1.63 per share, compared with $211 million, or $1.38 per share, in the same period a year ago, while Anthem reported that its third-quarter net income increased to $196.5 million, or $1.38 per share, versus net income of $171.2 million, or $1.29 per share, a year ago.

Evan Pondel, [phone]

evan.pondel(at)dailynews.com

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A GIANT IS BORN

SOURCE: Daily News research