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Last week saw the departure of CVS Health CEO Karen Lynch from a position that had established her as the most powerful woman in American business, heading a company with a revenue of $358 billion in 2023.
The company’s recent poor financial performance and weak profit forecast were the final straws for the CVS board. They had grown tired of Lynch’s inability to effectively integrate the various business components of a company that had morphed into a complex entity through a series of costly M&A deals.
Just three days prior, CVS’s rival Walgreens Boots Alliance announced plans to close 1,200 U.S. stores due to challenges in prescription fulfillment and declining retail sales. Many of these soon-to-be-shuttered locations were part of the 2,186 Rite Aid stores acquired by Walgreens in 2018 as part of a $5.2 billion deal after failing to acquire its smaller competitor outright. (At their peak, both CVS and Walgreens operated nearly 10,000 stores, but CVS has also been closing hundreds of stores.)
Like its larger counterparts, Rite Aid also faced difficulties stemming from M&A activities. A year earlier, Rite Aid had filed for Chapter 11 bankruptcy protection due to a heavy debt load, much of which originated from a 2006 acquisition of the Eckerd and Brooks chains. The expansion efforts of the major chains aimed at becoming national leaders in a sector traditionally dominated by independent and regional players, but the burden of interest expenses hindered Rite Aid’s store investments and its ability to expand health services.
The empire-building driven by M&A ultimately proved unsuccessful for all three drugstore giants, diverting their focus from their core business of retail operations. The lack of investment in drugstores has rendered them unappealing and outdated, particularly with essential products now kept behind lock and key, leading many consumers to opt for mail-order or drive-thru options for their medication. This shift has hindered the companies’ efforts to leverage their vast store networks as hubs for broader healthcare services. Retail sales at all three chains have been lackluster for years, with GlobalData managing director Neil Saunders noting that both CVS and Walgreens have prioritized healthcare ventures over retail operations, to their detriment.
CVS’s transformation from the Chain Value Store drugstore chain founded in 1963 to the sixth-largest company on the Fortune 500 began in earnest with the acquisition of pharmacy benefits manager Caremark for $21 billion in 2007. While this deal proved beneficial for CVS, subsequent acquisitions proved too costly and unwieldy to manage effectively. The $68 billion acquisition of Aetna in 2018 at a 73% premium, followed by the $10.5 billion purchase of Oak Street Health and the $8 billion acquisition of Signify Health, contributed to the company’s challenges. Lynch, who had previously been at Aetna, fully embraced the strategy to position CVS as a comprehensive provider of pharmacy services and basic care.
On the other hand, Walgreens focused heavily on physical drugstores for many years, culminating in the acquisition of British druggist Boots for $22 billion in 2014 and the attempted purchase of Rite Aid for $17 billion in 2015. The subsequent scaling back of the Rite Aid deal and other unsuccessful ventures led to a decline in Walgreens’ shares by 85% since 2015. Recent M&A activities, including a majority stake in VillageMD for $5 billion, further compounded Walgreens’ challenges.
As leaders at these chains navigate the complexities of their diverse assets, activist shareholders at CVS are advocating for a potential breakup of the company to address underperforming stock performance. This proposal would involve undoing much of the M&A activity that has defined the company’s trajectory over the past 18 years.
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