M&A Mania: Where’s the Finish Line?

Jim Gorman
Jim Gorman Director, Mizuho Americas
November 27, 2017

It’s no secret that Mergers and Acquisitions (M&A) has been making more headlines than usual as industry giants move to expand their kingdoms. Between Amazon’s takeover of Whole Foods and the amended Walgreens’ acquisition of Rite Aid stores, the impact of deals like these are being felt far and wide.

With even more consolidation in the forecast and recent indications toward less stringent regulation of M&A under the Trump administration, there doesn’t seem to be an end to the boom in sight.

While some have been quick to make decisions based on rumored deals and plans, investors should proceed with caution and not count their M&A eggs before they hatch - “free range,” of course.

Amazon: Playing Chess While Everyone Plays Checkers?

On a sleepy summer Friday a few months ago, newsrooms, social media and markets lit up as Amazon announced its planned takeover of Whole Foods. While it stole every headline and sent grocery stocks in a tumble, it didn’t take long for investors and pundits to speculate about other sectors vulnerable to an Amazonian invasion, with retail pharmacies taking the spotlight.

In the wake of Amazon’s acquisition of Whole Foods, CVS and Walgreens Boots Alliance, Inc., sold off sharply, trading -4% and -5% lower, respectively.

At the time, Ann Hynes, Managing Director, Equity Research at Mizuho Americas, said these market moves were “overdone,” as Amazon showed no indication it wanted to enter the pharmacy business.

CNBC started reporting that Amazon is on the brink of deciding if it will begin selling drugs online, with sources indicating a decision will come before Thanksgiving.

But Hynes was quick to question the notion that Amazon could seamlessly enter the space saying “we have been steadfast in our belief that Amazon will NOT enter the pharmacy market.”  However, if they do try, they have a lot of work ahead of them, as Amazon's current model would not translate into healthcare which is “complicated on both the B-to-B side (chain of custody of the product matters) and B-to-C (patient access).”

With the size of CVS and Walgreens’ operations - and the latter's acquisition of 42% of Rite Aid stores - there doesn't seem to be an acquirable chess piece on the board.

Only time will tell what Amazon’s next move is, but it appears Amazon’s push into pharmacy is “very much an ‘if’ and not a ‘when.’”

Should Amazon decide to enter the space, Hynes considers it a “long-term threat” due to the strong, personal relationship between seniors and their local pharmacists.

Rite Aid, Wrong Conclusion?

After nearly two years fighting to pass the regulatory muster to acquire Rite Aid Corp., Walgreens Boots Alliance Inc. finally completed a modified agreement a few weeks ago.  Under the terms, Walgreens will purchase 1,932 Rite Aid stores for $4.375 billion, instead of the whole company.

Walgreens Chief Executive Stefano Pessina told Bloomberg Television, “We have been a little surprised by the difficulties that we have found and by the length of the process... We had to change completely the structure of the deal.”

The restructured deal, however, still raised concerns for FTC Commissioner Terrell McSweeny, as the agreement allows Walgreens to become the largest U.S. pharmacy chain by number of stores. McSweeny is “concerned that the transaction will leave some communities with fewer pharmacy options and could lead to higher drug prices.”

Despite McSweeny’s reservations, the FTC declined its option to extend the review period by 30 days. Acting Chairman Maureen Ohlhausen said it is unlikely further review will “somehow uncover additional, different facts overlooked during the staff’s exhaustive 22-month investigation.”

Investors are now wondering whether this decision is an outlier based on the exhaustive length of review, or an indicator of a substantive shift in the regulatory regime.

Given the pace of M&A activity, it’s likely we’ll soon have another case to benchmark regulatory sentiment.

Uncertainty Ahead, but Opportunities Abound

Whatever happens next with Amazon, the FTC or the next unexpected acquisition to hit the Street, there’s sure to be a healthy dose of conjecture as the lines between publicity and pragmatism are blurred.

It’s easy to see how the scale of involved companies, magnitude of business pivots and potential gains capture investor’s imagination and attention. In the era of “fake news,” however, a return to facts and fundamentals isn’t just safe, it’s savvy.

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