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CVS: Calculated Acquisitions for Greater Market Share

The Move: CVS committed the capital necessary to push
through major acquisitions, giving the company a market advantage going into
the recession.

When CVS Corp. acquired Caremark Rx Inc. for $26.5 billion in
March 2007, it bought an expanding new
distribution channel: selling prescription drugs through direct mail, benefit
plans, or networks of pharmacies. The merger created a pharmacy giant that took
control of more than 1 billion prescriptions per year — a little less
than one third of the prescriptions filled in the United States annually. The
deal also gave the combined entity greater purchasing scale and operating efficiencies,
translates into an estimated $400 million in annual cost savings.

CVS, which bought the
Sav-On and Osco drug store chains in 2006, has become highly skilled at the acquisition process. The
company’s mergers are executed by integration teams focused on certain
areas of the acquired business, from systems to sales to new product
development. For the latest deal, CEO
Thomas M. Ryan helped finalize go-to-market strategies and
personnel integration, and has met with 3,000 Caremark employees since the deal
closed. The Caremark merger was CVS’s most
transformational acquisition to date because the Nashville-based pharmacy benefits manager taps a new market for CVS: home delivery. “CVS’s Caremark
acquisition propelled them. Before the acquisition they were just a traditional
pharmacy,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc. CVS Caremark is now the largest provider
of prescriptions in the nation, with 6,300 stores and approximately $85 billion in revenue.

This fall, as the economy stalled out,
the new juggernaut acquired Longs Drug Stores Corp., beating out rival bidder Walgreen
Co. with a $3 billion offer. The
deal expands CVS’s footprint in California, Arizona, and Hawaii. Many
Longs stores are in markets previously untapped by CVS. “For CVS Caremark, the acquisition
of Longs is complementary and gives it strong market share positions in many
regions where it has little penetration,” Mitchell P. Corwin of
Morningstar wrote in an href="">October analyst note.

That wasn’t all: CVS also rolled out its first high-end cosmetics store,
Beauty 360, opening a flagship store in Washington, D.C.’s Dupont
Circle in November. It has plans to add another 50 Beauty 360 units in 2009,
betting that women will still buy cosmetics despite
bleak economic conditions

CVS’s expansion has kept the company ahead of its
competition in a difficult economy. Third-quarter gains were stronger than second-quarter
results, thanks to growth at the chain’s drug stores and strong
pharmacy sales related to Caremark. Year-to-year net income rose 6 percent, and same-store sales, a key barometer
of a retailer’s health that compares stores open for
more than a year, increased 3.7 percent. Same-store sales at
Walgreens, by comparison, rose 2.6 percent.

“CVS is getting through the recession, and its
earnings are up because it’s a powerhouse,” says Davidowitz. “Caremark
is helping because it’s the fastest growing channel of distribution
over traditional drug stores.” Scott Mushkin, an analyst with Jefferies
& Co., predicts the chain will “continue to grow despite a
difficult economy.”

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