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Aetna Shares Fall on News of Rejected Takeover Offer

Wall St.: Stock drops more than 9%. Chairman sticks with plan to split company and says it can better improve from within.


Shares of Aetna Inc., the nation's largest health insurer, fell Monday on news that the company had decided to spurn a $10-billion takeover offer from Thousand Oaks-based Wellpoint Health Networks and Dutch investment bank ING Groep.

Wall Street's disenchantment with Aetna's rejection of the merger bid was evident early on, as research analysts for the nation's leading investment banks pounded company Chairman William Donaldson in a telephone conference call Monday morning.

"Your response [to the takeover bid] doesn't really hold together," one analyst said pointedly.

The stock slipped more than 9% Monday, closing at $50.75 on the New York Stock Exchange.

But Donaldson, a longtime board member who took over as chairman and chief executive just two weeks ago, stood firm in his view that Aetna's bottom line and stock price would be better improved by changes from within, rather than by a takeover.

Instead of merging with Wellpoint and ING, Donaldson said, Aetna would continue on the course announced late Sunday to divide itself into two separate companies and sell a number of assets.

"We don't want somebody else to do what we think we can do for ourselves," Donaldson said.

Wellpoint did not comment on Aetna's decision, other than to call it "disappointing." But a source close to the deal said that Wellpoint probably would not pursue the matter further.

"It's clear that there was a negative response on Wall Street today about [Aetna's] move," the source said. "But [Aetna] shut the door pretty tight on us. And we're not interested in doing anything hostile."

Donaldson called the Wellpoint offer of $70 in cash and stock for each Aetna share "totally inadequate," despite the fact that the company's stock traded as low as $38.50 before news of the Wellpoint-ING offer propelled it upward.

Not only was the offer too low, Donaldson said, it would be difficult to pull off.

"We saw substantial problems of integration with Wellpoint," Donaldson said. "They are a much smaller company operating in a much more limited market with very limited experience operating outside the state of California." A merger would also have invited antitrust problems and market-share problems, he said.

Kenneth Abramowitz, health industry analyst with Sanford C. Bernstein & Co., said he tended to agree with Donaldson, dismissing the 9.4% drop in the company's stock price Monday as the work of shortsighted profiteers. Aetna's problems, he said, have been exaggerated by investors who are looking only at the near term and reflect the overall market for health insurance more than specific troubles at the Hartford, Conn.-based insurer.

"They have very modest problems in the health-care area that are very easily fixed," Abramowitz said. "They're the same problems everyone has."

Left alone, Abramowitz predicted, Aetna's leadership could make stock in the two new companies worth more than the Wellpoint bid.

Donaldson is well-positioned to know about the difficulties incurred when one company attempts to swallow a substantially different one: Many of Aetna's troubles are a direct result of its own acquisitions, including the purchase of the health-care unit of New York Life Insurance and last year's takeover of Prudential's managed-care operations.

After both purchases, consumers complained that prices went up and customer service went down as Aetna struggled to blend disparate types of health plans into its existing base and meld sometimes incompatible computer systems.

As it moves forward, Aetna plans to focus on making changes to the health-care side of the business, which has been more troubled than the financial services area.

The company expects to bring in $500 million to $1.5 billion from the sale of its foreign assets and squeeze up to $150 million out of the health insurance and financial services divisions with cost containment measures, he said. The two divisions would be restructured as separate public companies by the end of the year.

Partly because of its size--Aetna provides health insurance for one in 10 Americans--and partly because of several well-publicized consumer lawsuits, Aetna has become a lightning rod for criticism of the managed-care system.

The company, which until a few years ago offered a mix of insurance products, moved heavily into managed care in the late 1990s, buying up enough competitors to make itself the largest and most powerful health insurer.

But the company's rigid policies and tight control on access to medical care quickly drew criticism from doctors, patients and regulators.


Investor Doubts

Since WellPoint Health Networks' and ING Groep's offer to buy Aetna became public two weeks ago, Aetna stock had risen 35%. But it plunged more than 9% Monday as Wall Street signaled its discontent with Aetna's plan to split into two.

Daily closes on the NYSE:


Monday: $50.75, down $5.25


Source: Bloomberg News

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