Can’t Win for Losing

It sounds like one of those riddles you hear from professors who aren’t quite as funny as they think they are: “When is a $700 million savings really a $2.3 billion loss?” Usually it’s the set-up for a problem in sunk costs, hidden costs, or multi-year depreciation that the accountants in your class love – and that remind the rest of us just how critical a good accountant is to any successful business venture. Yes, non-profits too. For a strategist, though, it’s usually an indication that there has been an unexpected consequence of what appeared to be a straightforward action. In the case of a publicly-traded company, it might not even have anything to do with the action itself, or even with anything your company did…

Consider, if you will, the case of Walgreens, CVS, Rite-Aid, Wal-Mart, Amazon, and an on-line pharmacy company called Pill Pack. If you’re not familiar with it, and I wasn’t until I read the CNBC story about this situation, Pill Pack is licensed to sell prescription drugs in 49 of the States, and booked about $100 million in sales last year. Wal-Mart has been in negotiations to buy Pill Pack for several months, but negotiations broke down when Wal-Mart balked at going over $700 million, at which point Amazon stepped in and offered $1 billion. Wal-Mart probably could have matched the offer, but they didn’t want to get into a bidding war with one of the only retailers their own size, and they didn’t believe Pill Pack was worth that much anyway…

This would probably be a non-story – Amazon has bought a lot of smaller companies, some of which panned out and some of which didn’t – if it hadn’t been for the stock market fallout. Within 24 hours after the transaction was announced Wal-Mart’s stock price dropped by $1.03, which doesn’t sound like much, until you realize that the company has almost 3 billion outstanding shares of stock, each of which is now worth a dollar less than the day before…

Not making the purchase saved Wal-Mart $700 million, but it ended up costing them $3.04 billion in market value, or a net loss of $2.3 billion. That might not seem fair, but consider what also happened to the three big drugstore chains mentioned above. According to a second CNBC story, Walgreens lost 9.9% of their stock price, Rite-Aid lost 11.1 % of theirs, and CVS lost 6.1%, for a combined loss of around $11 billion on the same day (June 28, 2018). Meanwhile, Amazon’s stock gained 2.5% on the same news, resulting in a gain of just under $20 billion…

Now, I’m not saying that we should blame the drugstore chains, or their leadership teams, for the losses in question – although I will be very surprised if at least some of their stockholders don’t start asking a few rather pointed questions at the company’s next General Meeting. I’ve got nothing to suggest that any of these companies, or even all three of them together, could expect to out-bid Amazon without bankrupting themselves, or that they would be able to recover the $1 billion if they did. I can’t even tell you for sure if Wal-Mart could do that and live. What I am saying is that the leadership of every company needs to be watching the competition, and potential competitors as well, exactly so they don’t get surprised by something like this…

Because, to paraphrase a very old joke, a few billion here, and a few hundred million there, and eventually it adds up to real money. And while I imagine Wal-Mart will survive this mistake without much difficulty, there is a limit to how many more times they can ignore the consequences of their actions…