CI Cigna Group

Insurers' ill-fated $48 billion tie-up hits dead end, but battle over damages looms

By Anna Wilde Mathews and Brent Kendall 

Anthem Inc. said it would finally give up on its ill-starred deal for Cigna Corp., setting the stage for a rancorous court battle between the companies over billions in potential damages.

The fight will play out in a Delaware court where each company has sued the other, both alleging breaches of their merger agreement. Late Thursday, a Delaware judge denied Anthem's request to keep Cigna locked in the $48 billion deal as Anthem continued trying to overcome antitrust rulings against the combination -- but he also signaled that Anthem appeared to have a good chance of proving its case that Cigna had violated their pact.

Anthem and Cigna originally unveiled their deal in July 2015, amid a frenzy of health-insurer deal-making that aimed to consolidate the top of the industry into a few behemoths that could wield enormous negotiating heft. But behind-the-scenes conflict between the two partners quickly set in, even as they publicly moved forward with their combination. Last year, the Justice Department filed an antitrust suit to block the deal, which would have created a company with a huge footprint in commercial insurance. A federal judge ruled against the merger in February and an appeals court upheld that decision last month. Anthem had sought to appeal that verdict to the Supreme Court.

But Anthem said Friday that it was giving Cigna notice that it was terminating the merger agreement. Anthem immediately reiterated its argument that its erstwhile partner sabotaged the deal, and it said Cigna isn't entitled to the $1.85 billion breakup fee laid out in the merger agreement. The bigger insurer said it would seek to claim "massive damages" against Cigna.

Cigna, for its part, wants the $1.85 billion and an additional $13 billion in damages from Anthem. In a statement Friday, Cigna said it believed Anthem didn't use its "reasonable best efforts" to get regulatory approval, and as a result the acquisition was blocked. Cigna said it seeks the damages against Anthem "for the harm that it caused Cigna and its shareholders." It also said it would ramp up its share repurchases in the wake of the deal's formal termination.

Jeffrey S. Jacobovitz, an antitrust lawyer with Arnall Golden Gregory LLP, said it isn't uncommon for there to be hard feelings between merging companies when a deal goes sour, "but you never really see bad blood like you've seen here." The situation "was highly unusual, particularly for two companies that wanted to get married, at least at the start," Mr. Jacobovitz said. The hostilities appeared even deeper than in a normal hostile-takeover transaction, he added.

The Delaware judge who will oversee the dueling Anthem and Cigna suits, Vice Chancellor J. Travis Laster, of the Delaware Chancery Court, said in his Thursday decision that Anthem "has a reasonable probability of prevailing on its claim" that Cigna breached the deal terms. The record in the antitrust proceedings indicates that "Cigna did not oppose the antitrust lawsuit fully or vigorously, as it was required to do," he said. However, he said it was a "tossup" whether Anthem would be able to prove that Cigna's actions led to the deal's failure to win antitrust approvals.

The judge also wrote that if Anthem's account of Cigna's behavior is correct, "then the damages it can recover from Cigna are potentially massive. ... At this point, in my view, a damages award is the only realistic form of relief."

A long and bitter legal road lies ahead, as the two sides spar over who did what to whom and rehash the troubled history of their deal.

The fight is already intensely personal, with Anthem accusing Cigna's chief executive, David Cordani, along with others at the company, of working against the deal after Mr. Cordani was at one point offered a postmerger position that fell short of the scope he thought was due to him. "Furious that he was not being provided with all of the postmerger powers that he desired, Cordani walked out of the meeting and never again would meet with [Anthem CEO Joseph R.] Swedish one-on-one," Anthem said in a filing.

Anthem said that Mr. Cordani was later offered broader responsibilities but "Cordanni, nonetheless, disengaged from the merger process and Cigna embarked on an unprecedented campaign to sabotage the merger and procure a $1.85 billion termination fee." Anthem said Cigna hired lawyers specifically to focus on ensuring it could get the termination fee, and it undermined Anthem's arguments for the deal in the antitrust case.

For its part, Cigna argues that the merger failed to pass antitrust muster because of the strategy that Anthem chose in defending the deal, which Cigna says was selected over its objections. Cigna said in a filing that Mr. Swedish and another Anthem executive plotted to "'get rid of Cordani' even before the merger agreement was negotiated and were still discussing their desire to 'take him out' months after the deal was signed." At another point, Cigna said, Mr. Swedish called Mr. Cordani "a 'bully' and refused to meet with him."

Cigna said that it "undertook enormous efforts toward integration."

Even when merger partners have tensions in the wake of a failed deal, litigation is unusual, said Jonathan Corsico, an attorney at Gibson, Dunn & Crutcher. Usually, executives say, "'it's over, let's move on,'" he said. Also, many contingencies for a blocked deal are pre-negotiated in the merger agreement, heading off suits.

It is also rare for merging companies to work at cross-purposes during a government antitrust review and court case. For instance, the Anthem-Cigna situation stands in contrast to court proceedings in 2015, when the Justice Department challenged Electrolux AB's planned $3.3 billion purchase of General Electric Co.'s appliance business. GE participated in the merger defense with Electrolux, even as it was considering exercising its right to terminate the deal.

GE, facing an improved market for its business, ultimately walked away from the merger during the court case, and later sold its appliance business to Chinese manufacturer Haier Group for $5.4 billion.

There has been recent litigation involving other quarrelsome merger partners, although under different circumstances.

Abbott Laboratories, for example, last year agreed to acquire Alere Inc. but the deal produced tensions, with both sides going to court. Alere filed a lawsuit to force Abbott to complete the transaction, while Abbott filed suit seeking to get out of it, saying that developments had reduced Alere's value. The two sides reached a pact last month, with Abbott agreeing to pay a lower price for Alere.

--Anne Steele contributed to this article.

Write to Anna Wilde Mathews at anna.mathews@wsj.com and Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

May 13, 2017 02:47 ET (06:47 GMT)

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