The American retail and pharmacy giant CVS Health Corp has been encountering several challenges in the market, pushing the company towards contemplating a potential breakup. However, selling off chunks of its vast business empire could be a perilous move. This article aims to provide a detailed analysis of why such a step could prove risky for CVS.
CVS, a behemoth in the retail and pharmaceutical world, has its foundations well set in the marketplace with over 10,300 locations across the U.S., maintaining a robust stance built over decades. However, several factors are applying pressure on this giant, leading it to consider deconstruction.
The Pressure on CVS Health Corp
Chief among these pressures is the threat from formidable competitors. Just like any other industry, the retail and pharmaceutical sector is constantly changing, with companies like Amazon making inroads into the pharmacy business, bringing down drug prices, and offering greater conveniences to the consumers.
Besides, the transition in healthcare delivery & services due to the COVID-19 pandemic has further intensified the competition, favoring flexible and agile businesses. Traditional retailers like CVS have found it difficult to adapt swiftly to this new virtual way.
Notably, CVS is also under pressure from activist investors like Engine Capital, pushing for a strategic shakeup to unlock the conglomerate’s ‘hidden’ value which has been embedded in its different segments – retail pharmacies, health insurers (through Aetna), and pharmacy benefits management via CVS Caremark.
Challenges in a Potential Breakup
While a potential breakup may seem like a plausible way to counter these pressures on the surface, it could, in fact, be fraught with several risks.
One risk is the potential for losing economies of scale. CVS has built its brand over the years as a one-stop-shop for health needs, coming along with advantages such as cost savings from shared operations. A breakup may result in higher costs for individual segments.
Another risk is associated with losing cross-segment synergies. The company’s PBM, retail pharmacy, and health insurance segments are highly interconnected in their operations. Dismantling this integrated model could disrupt the seamless customer experience CVS is known for, potentially alienating a portion of its customer base.
Moreover, the unstable post-pandemic economic environment could exacerbate these risks. During such uncertain times, embarking on a significant strategic shift may be highly challenging, both financially and operationally.
Lastly, a breakup could make CVS more vulnerable to its competitors. While a larger, diversified company could mitigate risks by spreading them across various sectors, a smaller, standalone entity may not possess the same resilience.
There’s also a risk of lower valuations: while breaking a conglomerate into singular-focused business can lead to a more straightforward valuation approach, it may not necessarily fetch the desired higher valuation multiple.
In Conclusion
While the pressure on CVS Health Corp is clear, the decision to break it up comes with its own set of challenges and uncertainties. It remains to be seen how the company navigates these tumultuous waters to continue serving its vast consumer base sustainably. Decisions like these should not be taken lightly and require meticulous planning, forecasting, and foresight. The giant has to weigh all possible outcomes before making a calculated gamble, one with the resilience and future of the company at stake.
