CVS’s $1.9 billion acquisition of Target’s pharmacy business is one of the more interesting deals in the news for a number of reasons. Let’s take a look at the transaction and explore why it makes sense strategically for both buyer and seller.
With this deal, CVS will have the opportunity to expand its footprint in a rapidly and significantly, predominantly through geographic expansion into the Pacific Northwest, where CVS has a weak presence. The acquisition will also quickly grow CVS’s market share in the pharmacy and prescription drug space. CVS, already the top provider of prescription drugs in the U.S., will become even bigger with this transaction.
On the other side of the coin, while CVS grows larger, Target is divesting. We often talk M&A in the context of exploring your five options for growth, one of which is exiting the market. Divesting can be an excellent strategy to recalibrate your business and focus on your strategic areas of growth. If an area of business is not profitable or is not in line with your overall growth objectives, you may want to consider exiting the business.
In 2014, Target’s pharmacy business operated at a loss. Given this situation and the complexity of operating a pharmacy business, it makes sense to sell Target’s pharmacy business to CVS, a highly skilled company that has the scale needed to successfully operate the business.
Another interesting part of the transaction is co-branding. CVS will rebrand Target’s clinics as Minute Clinics and add 20 new clinics in Target stores. 1,660 drug stores inside Target stores will also be rebranded as CVS. This move makes sense for both companies hoping to attract more customers by offering complementary services in one location. People may go to a Minute Clinic for same-day care or to fill a prescription and then decide to go shopping in Target. Or, they may be already shopping in Target and then decide to go into a Minute Clinic.
Of course, the devil is in the detail when it comes to execution, but hopefully CVS and Target will be able to fit all the pieces together in order to be successful.