Perks offered by CVS in deal under fire


Published: Saturday, January 20, 2007 at 6:01 a.m.
Last Modified: Friday, January 19, 2007 at 11:35 p.m.

NEW YORK — 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 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.

The promises made to Caremark executives haven't been lost on shareholders. A class-action lawsuit 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. The nation's third-largest pharmacy benefits manager 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, 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.

Instead, they have investors furious over a deal that has merits.

Investors, for now, are voting with their shares. The stock topped $58 a share in recent days, above both bids currently on the table. That means shareholders aren't sold on either side.

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