DID WALGREENS AND RITE AID BENEFIT FROM THEIR 2017 DEAL?

Abstract

Purpose- After several attempts that extended over two years, in 2017 the U.S. Federal Trade Commission approved Walgreens’ proposal to buy nearly half of Rite Aid stores. The two companies were in the same line of business making the merger fall in the category of horizontal mergers. The main benefits of horizontal mergers are cost savings from improved operational efficiency and superior bargaining power with respect to suppliers. Using annual financial statements, we examined the performance of Walgreens and Rite Aid over the four-year period since the acquisition of Rite Aid stores by Walgreens. The examination is useful because the Federal Trade Commission was not in favor of Walgreens’ earlier proposal to merge completely with Rite Aid, but later allowed it to buy almost half of Rite Aid stores. The present study examines whether the revised proposal benefitted both Walgreens and Rite Aid. Methodology- We collected annual financial statement data of the two companies from Mergent database and analyzed the common size statements and the relevant financial ratios. Findings- Analysis of profitability ratios indicate profit margins (gross as well as net) continued to decrease for both companies even after the acquisition. Both companies showed improved operational effeciency as reflected in Inventory Turnover and employee productivity, but Walgreens had a superior performance. Conclusion- Only four years have passed since Walgreens acquired Rite Aid stores. Our analysis of the limited data indicates that Walgreens seems to have benefitted more from the deal. Rite Aid, by selling about 46% of its stores to Walgreens in 2017, became a much smaller company. The smaller size did not affect the cost of inventory or financing, but its profitability did not improve.

Keywords

• Walgreens
• Rite Aid
• drugstores
• pharmacies
• mergers

References

1. Agarwal, P., Mittal, R. (2014). Mergers and acquisitions analysis with the case study method. International Journal of Management and Commerce Innovations, 2(1), 236-244.
2. Avkiran, A. K. (1999). The evidence of efficiency gains: The role of mergers and benefits to the public. Journal of Banking & Finance, 23, 991-1013.
3. Bilbeisi, K. M., Narayanaswamy, C. R., Dinh, C. (2018). Was the dollar tree – famıly dollar merger synergic?: financial statements analysis . Journal of Business Economics and Finance, 7(2) , 148-155. DOI: 10.17261/Pressacademia.2018.837
4. Cabanda, E., Pajara-Pascual, M. (2007). Mergers in the Philippines: Evidence in the corporate performance of William, Gothong, and Aboitiz (WG&A) shipping companies. Journal of Business Case Studies, 3(4), 266-278.
5. CVS. (2022). Our history https://www.cvshealth.com/about-cvs-health/our-purpose/our-history
6. Fraser, L.M., Ormiston, A. (2001). Understanding financial statements, Sixth Edition, Pearson Education, Prentice Hall.
7. Gottfried, M., Grant, C. (2017). Rite Aid Stock Crashes into the Drugstore Bargain Bin. The Wall Street Journal, New York, N.Y., 30 June 2017.
8. Harrison Jr. W. T., Horngren, C. T. (2008). Financial Accounting. seventh edition, Pearson / Prentice Hall.

9. Healy, P.M., Palepu, K. G., Ruback, S. (1992). Does corporate performance improve after mergers? Journal of Financial Economics, 31 (2) 135-175.
10. Hufford, A. (2017). Drugstore Giants Lower Deal. The Wall Street Journal, Europe, 31 Jan 31, 2017.
11. Ibrahimi, M., Meghouar, H. (2019). Sources of value creation and destruction in horizontal merger acquisitions. Managerial Finance, 45 (10/11), 1398-1415. DOI 10.1108/MF-02-2018-0053.
12. Ismail, T.H., Abdou, A.A., Annis, R. M. (2011). Review of literature linking corporate performance to mergers and acquisitions. The Review of Financial and Accounting Studies, 1, 89- 104.
13. Matitioli, D., Siconolfi, M., Similluca, D. (2015). Walgreens agrees to buy Rite Aid for $9.4 billion; Deal creates drugstore giant amid a consolidating health-care industry. The Wall Street Journal, New York, N.Y. 27 Oct 2015.
14. McSweeny, T. (2017). Statement of Commissioner Terrell McSweeny In Walgreens Boots Alliance/Rite Aid, Matter Number 1710181, Federal Trade Commission, September 19, 2017.
15. Mergent Online. (2022). Mergent Incorporated, https://www.mergentonline.com
16. Rhoades, S. A. (1998). The efficiency of bank mergers: An overview of case studies of nine mergers. Journal of Banking and Finance, 22, 273-291.
17. Rite Aid. (2022). Rite Aid Corporation History, https://www.riteaid.com/about-us/our-story
18. Terlep, S., Kendall, B. (2017). Walgreens, Rite Aid End $9.4 Billion Merger: Walgreens instead aims to buy half of Rite Ai stores after merger plan drew heavy regulatory scrutiny” Wall Street Journal (online), 29 June 2017.
19. Walgreens Boots Alliance. (2022). History, https://www.walgreensbootsalliance.com/about-us/history
20. White, G.I., Sondhi, A. C., Fried, D. (2003). The Analysis and Use of Financial Statements, Third Edition, John Wiley & Sons, Inc. © 2003.