The CVS Corp (CVS) - Caremark Rx Inc (CMX) deal is raising many as-yet-unanswered questions about the timing of the deal.
Today’s Wall Street Journal article on Tom Ryan’s background (CVS's Deal Maker Faces Toughest Test Integrating Caremark) alludes to some of the investor discontent, noting: “Some Caremark shareholders are grumbling that the purchase price is too low; some wonder if the sale is driven by weakness in Caremark's business.” In contrast, the original article from last week (CVS, Caremark Unite to Create Drug-Sale Giant) focuses on the conflict-of-interest issues because it was co-written by Barbara Martinez.
Below are the four hypotheses that I am hearing in my conversations. Vote for your favorite (anonymously, of course). If you choose "None of the Above," please add comment to this post with your preferred explanation.
Hypothesis 1: Why not?
Given the strategic rationale for channel compression, a deal was inevitable at some point in the next few years. (My take was posted on Thursday as Consolidation of the US Pharmaceutical Infrastructure). In brief, CVS has been trying to get closer to employers and payers with Pharmacare. At the same time, Caremark has become a major dispensing pharmacy through its mail order and specialty pharmacy activities. Why not now?
Hypothesis 2: Business Model of the Living Dead
The most common hypothesis, which I have heard repeatedly over the past few days, views the deal as a harbinger of change for the PBM business. By selling now (at a discount), Caremark is telling us something bad about future PBM business model, despite the Q3 results posted on Thursday. However, there is no consensus on the bad news to come. (Transparency? AWP? Lawsuit? Professor Plum in the Pharmacy with a Pestle?) This hypothesis helps to explain why Caremark was recently buying back its own shares at 20%+ more than CVS is paying now.
Hypothesis 3: Over the Hedge
Some argue that Caremark is sneaking out at the top, as Matthew Holt of The Health Care Blog suggests. This hypothesis is similar to the previous one, but does not contemplate the future revelation of hidden problems. Caremark’s stock bottomed out in the late 1990’s and is up 25X since then. Future sentiment looks more negative, so perhaps it was time to trade equity in a transactional intermediary for bricks-and-mortar and a strong consumer brand. (Shades of AOL/Time Warner!) One problem with this hypothesis is the fact that the stocks have performed similarly over the past two years. (See this Yahoo!Finance chart.)
Hypothesis 4: The Santa Clause
Over the weekend, I read an intriguing analysis by The Corporate Library arguing that the merger could trigger a change of control payment to Mac Crawford (Caremark’s Chairman, President, and CEO) of $17.6 million cash and $269 million in vested equity. However, the report also indicates that a lack of disclosure makes it hard to tell what’s really going on. Caremark’s board would not allow the deal to go through just because the CEO stands to get a big payout…right?
What do you think? ‘Tis the season, so cast your vote.
A technical note on voting: This survey prevents duplicate voting from the same domain in the same day. If you see a message indicating that you already voted, it means that the survey software can’t distinguish a unique IP address from your company. Sorry, ballot stuffers!