Commentary: The Right Doctor For Aetna?

Imagine how you would feel if a stock you owned was still trading at the level it first reached 15 years ago. Then pity giant health-care insurer Aetna Inc.'s long-suffering shareholders, who have watched their company lurch from crisis to crisis this year. Aetna stock plunged 17% on Feb. 8 after a poor earnings showing. Then the company ousted Chief Executive Richard L. Huber, who had been at the helm only 2 1/2 years--but long enough to become the poster boy for everything everyone hates about managed care.

The man who drew the short straw to fix the mess was longtime Aetna Director William H. Donaldson, a founder of investment bank Donaldson, Lufkin & Jenrette Securities. Since taking over on Feb. 25, Donaldson has tried to repair Aetna. He brought in Waste Management Inc. alum Steve Miller as a personal adviser, launched a full review of the broken health-care business, and said Aetna would split into two publicly traded companies: one for health care, the other for financial services. "I definitely don't think it's too late," Donaldson insists. "We're on the right track."

LOWBALL. All the same, he's likely to face angry investors at the company's Apr. 28 annual meeting in Hartford. The reason: On Mar. 12, he rejected as lowball a $70-per-share offer for Aetna made jointly in mid-February by ING Americas and Wellpoint Health Networks. The offer wasn't revealed until Mar. 1, but it gave the company's shareholders a thrill they hadn't had for ages: The stock soared 36%, to $56, in 48 hours.

Donaldson's main objection to the bid makes sense. The offer was for less than Aetna's $75 per share book value. But shareholders' interests would have been better served by trying to talk up the bid--or find a rival buyer--rather than rejecting it out of hand. The rebuff has prompted at least four shareholder lawsuits. One class action, filed in New York's Supreme Court, seeks to enjoin Aetna directors from taking any actions that don't seek to maximize shareholder value at Aetna.

Among shareholders, there's skepticism that Donaldson, who has been on the board since 1977, can deliver. After all, a lot has gone wrong. Doctors and patients are angry. Aetna hasn't delivered the growth it promised in 1996, when it cut dividends and paid a pricey $8.9 billion for U.S. Healthcare. And analysts say that Aetna hadn't even fully folded in the Pennsylvania company last year when it bought troubled Prudential Healthcare. "Aetna is a company that has performed badly for more than 20 years," says Banc of America Securities analyst Todd B. Richter. "Can the current Aetna management fix it? I don't think so. Why was the market underwhelmed when they selected a guy to run the company who has been on the board that has backed these unbelievably dumb decisions since 1977?"

Fixing a broken health-care company is a monumental task at the best of times. But for Aetna it will be tougher than most, because its unpopular policies have alienated the doctors it depends on in its health networks. What's more, Donaldson doesn't even have the management team on board to fix the health business. In what some analysts see as a stunning admission of the company's failure to develop deep management strength,

Aetna announced on Apr. 6 that it had hired a search firm to find a chief executive to run its health-care business. Donaldson says he has some good candidates, but there's reason to be doubtful that Aetna will find anyone who's up to the task. A number of other health-care companies, including PacifiCare Health Systems, have spent months unsuccessfully searching for CEOs.

But there is a CEO out there who wants to run the company and has the track record. Indeed, the best fix for the health-care business may be a merger with Wellpoint, whose CEO, Leonard D. Schaeffer, is one of the health-care execs most highly regarded on Wall Street for his work in transforming a money-losing Blue Cross company in California into one of the most profitable health insurers today.

Donaldson insists there's no quick fix in a merger. Indeed, he notes that Wellpoint, with 7.3 million members, is one-third the size of Aetna: Swallowing the company would be no easy feat. But given Aetna's long, dismal track record, it may be the most palatable way out for shareholders at this point.

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