Inside CVS and Walgreens’ downturn: How misguided M&A damaged America’s drugstores

The company’s poor financial performance last quarter and weak earnings outlook proved to be the last straw for CVS’s board of directors. She was tired of her inability to successfully bring together the various business components of a company that had, through a plethora of expensive mergers and acquisitions, become a Frankenstein.

Three days ago, CVS rival Walgreens Boots Alliance announced it would close 1,200 U.S. stores in an environment of challenging prescription fulfillment and weak retail sales. Many of those soon-to-close locations were part of the 2,186 Rite Aid stores Walgreens bought in 2018 in a $5.2 billion consolation prize deal after failing to buy its smaller rival outright. (At their peak, CVS and Walgreens had store fleets of nearly 10,000 locations. CVS has also closed hundreds of stores.)

Like its larger competitors, Rite Aid also has some M&A eggs on its plate. A year ago, Rite Aid filed for Chapter 11 bankruptcy protection, choking under the weight of debt, about $3 billion of which originally stemmed from the acquisition of the Eckerd and Brooks chains in 2006. At the time, the big chains were trying to grab territory To emerge as national leaders in a sector long dominated by independents and small regional chains, but high interest expenses hampered Rite Aid’s investment in stores and its ability to build out its health services.

All this mergers and acquisitions-fueled empire building ultimately failed, and caused the Big Three drugstore companies to shift attention away from their core business: operating stores. Underinvestment in pharmacies has led to them becoming unattractive (and even worse now, with half of what you want from a storefront behind lock and key) and outdated, with many Americans choosing to get their medications through the mail or drive-thru. This, in turn, ultimately hurt the three companies’ efforts to use their thousands of stores as hubs to create a broader healthcare business. Retail sales at all three chains have been weak for years. “Both CVS and Walgreens have been guilty of chasing health care dreams at the expense of retail. That myopia is hitting them hard now,” says Neil Saunders, managing director of GlobalData. luckCVS said its stores were thriving.

Let’s take CVS. Its transformation from the 1963-founded Chain Value Store pharmacy chain into the sixth-largest Fortune 500 company began in earnest in 2007, when it bought pharmacy benefits management company Caremark for $21 billion. While this deal proved beneficial to CVS, particularly by helping build a larger mail-order pharmacy and making it a big player in the booming pharmacy benefit management (PBM) market, subsequent deals were too costly and made CVS too unwieldy to Manage it effectively. In 2018, CVS paid $68 billion to buy Aetna (where Lynch had been for years) at a 73% premium. This followed a $10.5 billion deal last year for Oak Street Health, which owns more than 200 centers in 25 states that provide care for the elderly, and acquired Signify Health, a company that provides health care analytics, for $8 billion. (To be fair, deals like the one to buy Target’s pharmacy business in 2015 have worked out well.)

Even though Lynch came from Aetna, getting it wasn’t actually her idea. The plan was drawn up by the CEO before her, Larry Merlo, who chose it carefully As his successor. But she bought the entire strategy. Its idea was to make CVS a one-stop shop for essential pharmacy and care services, thanks to hands-on, data-driven management from its internal insurer that reminded people to refill prescriptions and get their annual checkups.

In contrast, Walgreens has doubled its drugstore sales for many years. In 2014, Walgreens completed its purchase of British pharmaceutical company Boots for $22 billion in an attempt to create the first international pharmacy operator. The architect of this deal, Stefano Pessina, later became CEO and then in 2015 pushed to buy Rite Aid for $17 billion. Two years later, after intense regulatory scrutiny, Pessina scaled back the Rite Aid deal and Walgreens bought 2,000 of its 5,000 stores, many of which overlapped with existing Walgreens stores and were somewhat run-down.

Walgreens’ more recent mergers and acquisitions have veered away from traditional pharmacies but have not yet been successful. In 2021, it took a majority stake in primary care clinic chain VillageMD for about $5 billion, only to write off much of that earlier this year after Walgreens decided to shrink the business.

And now Walgreens is closing several of the Rite Aid locations it purchased, meaning this deal was closer to lighting a big chunk of the $5.2 billion on fire. (Walgreens also failed to sell Boots, which was once thriving but has struggled more recently.) The result of Walgreens’ M&A activity in the past decade is that shares are down 85% from their highs in 2015 when Pessina became CEO.

Now the leaders in these chains have to figure out what to do with the random assets they’ve been left with. At CVS, activist shareholders fed up with the stock’s poor performance have an idea: Ironically, they are pressuring the company to consider breaking itself up, undoing much of the mergers and acquisitions of the past 18 years.