| ||||||||||
| ||||||||||
— Analysis —
Where can you find a good, current case study in the power and perils of M&A in a changing industry? Try your corner drugstore. The case will depend on which of the top three chains you're nearest: CVS Caremark Corp. of Woonsocket, R.I.; Walgreen Co. of Deerfield Park, Ill.; or Rite Aid Corp. of Camp Hill, Pa. All are big companies; CVS, the biggest, has nearly 7,000 stores and $76 billion in sales. Each has done multiple deals in a long-running contest to build national retail networks while also adding the right mix of related businesses -- from pharmacy benefits management to specialty pharma services to in-store and workplace clinics -- as the boundaries shift in the U.S. healthcare system. Start with also-ran Rite Aid. A chain of nearly 5,000 stores, Rite Aid is suffering from its 2007 acquisition of 1,800 Brooks Eckerd stores from Jean Coutu Group Inc., which got them in a 2004 transaction in which CVS took the rest of the chain. Like Coutu, debt-burdened Rite Aid has found integration tough. In October it brought in a new chief operating officer (Mary Sammons remains CEO), and in April the company announced a quarterly loss of $2.3 billion, largely because of a goodwill-impairment charge related to the deal.
Rite Aid has been playing catchup ever since an acquisition spree ended in an accounting scandal in 1999. A brush with bankruptcy ensued, but the most interesting detail, in light of subsequent events, is Rite Aid's brief ownership of PCS Health Systems, a pharmacy benefit manager it bought from Eli Lilly and Co. in 1999 for $1.6 billion. In 2001, Rite Aid sold PCS to Advance Paradigm, a rival PBM, for just $1 billion. At Walgreen, the once and maybe future leader, the story is different, but the going still hasn't been entirely smooth. Known for its conservative culture, profitability and organic growth (it now has 6,600 stores), Walgreen has acquired other chains sparingly while emphasizing smaller deals to move into adjacent businesses. Its $850 million purchase of Option Care Inc. in 2007, for example, made it the largest supplier of in-home infusion services. For Walgreen, the exception on big retail bids came last September, when then-CEO Jeffrey Rein tried to wrest Longs Drug Stores Corp. away from CVS Caremark. Why? Neil Stern of retail consulting firm McMillan Doolittle LLP calls Longs, with its prime locations in California and Hawaii, a "once-in-a-lifetime real estate opportunity." But Longs spurned the bid, and in October Walgreen dropped it. Rein then retired after just two years as CEO. CVS Caremark got Longs for $2.9 billion, with the deal closing in early January. Later that month, Walgreen announced its new CEO. After considering several outside candidates, the board went with insider Gregory Wasson, but Walgreen has recently brought in other top executives from outside, breaking with past practice. Integrating retail with the new businesses in the health services unit requires an unusual mix of retail and healthcare talent. At CVS Caremark, CEO Tom Ryan is building a healthcare company that's even more ambitious in scope. CVS has honed its retail integration skills in a series of deals dating to the late 1980s, using "money and a plan," as consultant Stern puts it, to convert the stores to its format. Stern contrasts the $350,000 per store CVS spent successfully integrating the Brooks Eckerd stores it bought in 2004 with the mere $50,000 per store Jean Coutu Group Inc. could muster. CVS says it will have Longs fully integrated by the end of 2009. But the real challenge will be making good on the vision that led Ryan to acquire pharmacy benefit manager Caremark Rx Inc. for $26 billion in 2007. Progress so far has been good, but the scale and complexity of this bet -- basically, an attempt to combine a giant drug middleman serving institutional clients with a mammoth retail organization, with a sophisticated IT system at the hub -- mean it's no sure thing. Walgreen, for one, has been far more conservative about the PBM business. As it happens, one of the things CVS got with Caremark was the PCS business owned briefly by Rite Aid. Caremark picked it up when it acquired AdvancePCS in 2004. CVS is clearly doing better with it. Case study closed? Probably not -- for any of the these three players. |
|
|
|
|
|
