FOR YEARS, the Common Sense mergers-and-acquisitions playbook has stood me in good stead, and I've often referred to it when buying or selling shares in targets or acquirers and when dispensing advice in this column. But the Caremark Rx takeover saga, which ended last week, has me wondering whether I should throw it out and start all over again. For those of you less riveted than I was by this drama, let me briefly recap the action: Last November, CVS ( ), the big drugstore chain, announced a friendly acquisition of Caremark Rx, a big pharmacy-benefits manager, for $21 billion.
Then a rival benefits manager, Express Scripts ( ), jumped into the fray with a much higher bid for Caremark, and a bidding war was underway. CVS had to raise its offer twice to secure shareholder approval for the deal. Ultimately, CVS paid $26.
5 billion and is buying back 150 million of its shares. Where did the playbook go wrong? Reality: CVS shares did plunge, but since it never offered much of a premium, Caremark shares didn't rise.
In fact, since it was largely a stock deal, Caremark shares also dropped. Express Scripts shares, which should have dropped, soared on news of its bid. Playbook: Bidding wars are great for the target, but terrible for the acquiring company's shares.
Reality: The same investors who hated the CVS-Caremark deal when it was first announced seemed to love it every time CVS offered to pay more. CVS shares kept rising the more it increased its bid. Express Scripts shares also rose when it raised its bid.
This was of more than academic interest to me, since I owned Caremark shares (it was one of my "Ten Stocks for the Next Decade" back in 2002.) As I wrote , I was disappointed CVS wasn't offering a bigger premium, but told myself not to be greedy. Meanwhile, when CVS shares got crushed, I stepped in and bought CVS options, both because I thought the deal made strategic sense and because CVS was getting Caremark at a bargain price.
No one else seemed to share this view. CVS shares kept wilting, dropping to just over $27 by the end of November. On Dec.
17, Express Scripts lobbed in its $26 billion offer, a substantial premium to the CVS bid. I was pleased as a Caremark shareholder, of course, but dismayed for CVS. The last thing I wanted as a potential CVS shareholder was for CVS to get in a bidding war.
I thought of unloading my CVS options. Then strange things started happening. Caremark shares predictably rallied, but so did CVS shares.
Maybe that's because investors who never liked the deal thought CVS would get outbid; CVS didn't raise its offer. By the end of January CVS shares had climbed to more than $33, nearly where they were before the deal was announced. But then CVS shares started dropping again, hitting $30.
79 on March 5, just after shareholders sued to block the deal. On March 8, Express Scripts boosted its offer, and CVS finally followed suit, boosting its cash dividend. The bidding war I'd feared was now reality.
Yet CVS shares continued to rally. They rose again after CVS raised its bid again, this time to $26.5 billion.
The day the deal closed last week CVS shares traded above $34, a level they hadn't seen since September and not that far from its 52-week high of just under $36. A deal CVS investors hated at $21 billion they loved at $26.5.
Go figure. Maybe investors simply came around to my view that the deal made sense from the beginning, even at a higher price. Somehow I doubt it.
From a financial perspective I have nothing to complain about. I still like the combined CVS Caremark, and continue to own my options, which don't expire until 2008. Whatever the underlying reasons, I made money, both on my Caremark shares and the CVS options.
But I may have come out ahead for all the wrong reasons. The upshot is that I'm not throwing out the M A playbook. It's been tested for too long and has generated too many sound investment theories, including, as it turned out, this one.
But this deal left me scratching my head, humbled yet again by a market that sometimes behaves the way you least expect. SMARTMONEY Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones Company, Inc.
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