$66 billion. That’s more than the GDP of entire nations such as Luxembourg or Panama, and the price of the proposed bid for Aetna by CVS. This year has offered no prudence in outrageous mergers and acquisitions. Amazon bought Wholefoods, AT&T and Time Warner are looking to merge, Verizon bought Yahoo, and significant others proposed or rejected. At first glance it may seem eerie that what people know as a store is buying a gigantic health insurance company. CVS is more than your retailer offering prescription refills and packs of gum by the country, but a full service health company. They have dropped all tobacco products, offer minute clinics, and have swelled to a market cap beyond what anyone’s imagined. For such a sudden and drastic move, the question is why?
1. Competitive Edge
Essentially, CVS’s decision is a result of trying to gain a competitive edge. CVS typically used their bargaining power as one of the largest buyers and suppliers to get pharmacy discounts and special deals from pharmaceutical companies and others. By now bidding on Aetna, they have the power for better discounts in leveraging retention of their customers and expansion. CVS must see this as high and reason enough to justify a $66 billion bid.
2. Preemptive Defense against Amazon
Most companies need an ‘Amazon Moat’ as of recently. The giant led by Jeff Bezos has no intentions of slowing down anytime soon, all industries are threatened. This includes media production, video on demand, eCommerce, groceries, cloud services, shipping, and possibly the health industry. By buying Aetna, CVS is doing something Amazon can’t do which is holding onto their niche of a full service health company. Amazon technically could, as could Apple or any other company hoarding cash, but this would spread the technology company thin.
3. Become sector leader
CVS is putting the nail in the coffin on Walgreens and Rite Aid. Walgreens and Rite Aid were planning on a merger which company executives initiated for the reason of countering CVS and the behemoth it was becoming. The deal died in September and with CVS expanding and stronger than ever without higher gross margins and better situated debt, it now leads the industry it’s in – or the industry it has created. CVS is thinking strategically in how its different business segments operate and now offers more than what was imaginable for the drug store officially making its move a ‘blue ocean’.
4. Loosened Regulation
CVS may be looking to take advantage of loosened regulation. The current administration has been known for its lax policies regarding business regulation especially for the financial industry. Express Scripts was able to buy Medco Health and gained FTC approval just a day after, but with the size of these two companies and a more formal review needed by judges it could take a longer.
5. Tax, Interest Rates, & Cash Implications
CVS’s cash position has swelled up from 2.4 billion to 3.5 billion in the past year while historically it was around the $2 billion mark. Investors may be pressuring CVS to put this cash and other assets to higher growth opportunities especially while interest rates are low before impending hikes as hinted by Yellen.
Cigna and Anthem went bust as did Walgreens and Rite Aid, but CVS is on the fast lane to be approved for its acquisition of Aetna changing the field of insurance, pharmaceutical, and pharmacies forever.