The merger of AmeriSource Health Corporation and Bergen Brunswig Corporation formed Amerisource Bergen Corporation, the largest pharmaceutical wholesaler in the US. The merger combined AmeriSource's focus on drug distribution with Bergen's pharmaceutical distribution, pharmacy, and healthcare services to create synergies around supply chain efficiencies. Key goals of increased market share, cost reductions, and improved profits were achieved through streamlining operations, upgrading technology systems, and gaining purchasing power. The resulting company continues to be a leader in the pharmaceutical supply chain industry.
Accountable Care Organization – Improving Care & Reducing Cost
Amerisource Bergen Presentation V6.0 Final
1. The AmeriSource Acquisition of Bergen Brunswig to formAmerisource Bergen Corporation Presented byDavid Nordella and Victoria Pearson HSM 533 – Mergers and AcquisitionsDepartment of Health Services ManagementUniversity of La Verne Joan Branin, Ph.D.Professor and DeanFall TermNovember 2, 2010
2. Presentation Overview Introductions History of Amerisource Health Corporation (suitor) History of Bergen Brunswig Corporation (acquired) Amerisource Bergen Corp. Post Merger Analysis Key Players Financial Overview Legal Considerations Business Considerations Summary Questions
4. History of AmeriSource Health Corporation (NYSE: AHC) (Suitor)
5. History of Amerisource Health Corp. (AHC) AmeriSource was no stranger to M&A prior to the acquisition of Bergen Brunswig. AHC had a long history of aggregation and innovation. The company was originally privately incorporated as Alco Standard in 1960. Alco Standard had annual sales of $5M in 1960. Alco Standard goes public in 1977. Alco Standard builds by a conglomerate network through acquisition.
6. AHC History continued Each acquired company was provided autonomy. Alco Standard’s role was to provide legal and tax support. Emphasis of conglomerate became drug wholesaling. Third largest pharmaceutical wholesaler in the nation by early 1980s.
7. AHC History continued The drug industry was experiencing enormous changes during the early 1980s. Healthcare expenditures were rising and represented 10% of the Gross National Product. Demographics were driving the growth. Alco Standard’s drug distribution business was spun off in 1985. Newco is Alco Health Services.
8. AHC History continued Oldco, Alco Standard, held 60% of Alco Health Services after the spin-off. Alco Health offers to help independent drug retailers with marketing, merchandising and Group advertising. Independent drug retailers competed successfully with drugstore chains because of help from Alco Health Service.
9. AHC History continued Retail support, with “home use” medical equipment under Total Home Health Care brand is introduced in 1982. Marketing support includes direct-to customer delivery and accounting assistance. Health Information Management systems were offered to independent retailers in 1985. Alco Health Services also sought business chains and wholesalers during this period.
10. AHC History continued New customers in 1980s: Hospitals and Health Care Facilities. Annual sales surpassed $2B in 1988. Management attempted LBO in 1988. LBO blocked by Federal Trade Commission (FTC). McKesson Corporation offers $30 a share. FTC blocks McKesson’s offer as uncompetitive.
11. AHC History continued Alco Standard explores options with their investment banker, Drexel Burnham Lambert. Citicorp Capital Ltd. and Alco managers create ASCO Holdings Corp. to acquire 92% of Alco Health. Consolidation continues in drug wholesaling. Alco changes name to AmeriSource Health Corp. in 1994.
12. AHC History continued AmeriSource offers national telemarketing on behalf of retail customers in 1995. Retail customers sue over whether AmeriSource is giving discounts to HMOS, hospitals and mail-order pharmacies. Judge dismisses suit in District court. AmeriSource propose merger with McKesson in 1997.
13. AHC History continued AmeriSource gains contracts with Dep’t of Veteran Affairs in 1999. More acquisitions in 1999. AmeriSource becomes “Preferred Provider” of Pharmacy Providers Service Corp. representing over 1,200 independent pharmacies. AmeriSource becomes Preferred Provider of Premier, Inc., the nation’s largest alliance of hospitals and healthcare systems. AmeriSource had net revenue of $11.6B as of FYE 9/30/00.
15. Bergen Brunswig Corp. (BBC) History Started in early 1800s Three core business verticals Pharmaceutical Distribution Pharmerica Other Funder: Lucien Brunswig, emmigrant – France Apprentice druggist in USA Started wholesale drug supply $350K revenue within 5-years
16. Bergen Brunswig Corp. (BBC) History Partnerships and geographic expansion west Died 1943 before company’s explosive growth Bergen acquired Brunwig 1969 1990s wave of consolidation Multiple sole distributorship agreements Columbia/HAC Healthcare merger catalyst for domination Expanded to full service value added supplier Multi media product Proprietary catalogs and electronic ordering systems
20. Motives for The Merger Greater value for shareholders, gaining undervalued assets. Rapid, reliable growth. Synergies from combined businesses. Increased market power from horizontal merger. Cost-reductions through economies of scale. scope.
21. Motives for the Merger Cuts in expenses to improve profits from revenues, positively impacting earnings. Financing posture expected to be improved as investment banking fees were spread over a wider base. Firm could achieve lower interest expense as banks competed for larger loans. The goal was to achieve all of these objectives through superior management skills.
22. AHC & BBC Merger Process Focus was specific operational and technical systems,” information systems; sales and marketing; finance and back office operations; procurement and distribution and human resources. Fully automated sorting, distribution network Upgrade to SAP
23. AHC & BBC Merger Process Accounted as purchase method for business combinations, AmeriSource acquired Bergen. Merged company valued at $7,000,000,000. AmeriSource stockholders owned 51% of new company's 103 million shares outstanding Conversion ratio 0.37 share of AmeriSourceBergen Corporation (ABC) per share of Bergen Brunswig and 1.0 share of ABC per share of AmeriSource Health. Neither group of shareholders was taxed on the value of the merger, as no cash consideration paid.
24. AHC & BBC MergerKey Participants Goldman Sachs & Co. acted as advisor to AmeriSource Health Corporation. Merrill Lynch, Pierce, Fenner & Smith, advisor to Bergen Brunswig Both parties retained Deloitte Consulting to assess both, determine makeup integrated organization
26. AHC Accounting for the Merger AmeriSource Health Corporation (AHC) Year over Year comparison; 9/30/99 to 9/30/00. Current ratio - 1.42x to 1.32x, Unfavorable. A/R Turnover – 15.93 days to 18.61 days, Unfavorable with a caveat. Av. Collection Period – 22.91x to 19.62x, Unfavorable with a caveat. Inventory Turnover – 7.85x to 7.39x, Unfavorable.
27. AHC Accounting for the Merger Debt/Equity Ratio – 3.36x to 1.46x, Favorable with a caveat. LTD/Assets – 0.27x to 0.17x, Favorable. Times Interest Earned – 2.79x to 3.37x, Favorable. Total Margin – 0.01x to 0.01x, No change in Favorability. Return on Assets (ROA) - 0.03x to 0.04x, Very Favorable.
28. AHC Accounting for the Merger Return on Investment (ROI) – 0.41x to 0.35x, Unfavorable. Earnings per Share (EPS) – 1.32x to 1.90x, Favorable. Price/Earnings (P/E) ratio – 4.47x to 6.17x, Favorable and dirt cheap!
31. BBC Accounting for the Merger 9/30/999/30/00 LIQUIDITY Current Ratio, Favorable 1.29 1.86 ACTIVITY Accounts Receivable Turnover 13.20 18.62 Favorable trend, 141% increase in receivables turnover. Average Collection Period 27.66 19.60 Favorable, improving by 71% Inventory Turnover 11.71 11.10 The trend is Unfavorable.
32. BBC Accounting for the Merger 9/30/999/30/00 CAPITAL STRUCTURE Debt/Equity Ratio .70 1.52 Unfavorable, substantial operating loss in 2000; acquired 9 companies, depleted cash, increased debt. Long-term debt/Assets 0.19 0.24 Unfavorable with a substantial increase in Leverage. Times Interest Earned 1.86 -4.56 Unfavorable. Net loss in 2000, increased debt.
33. BBC Accounting for the Merger 9/30/999/30/00 PROFITABILITY Total Margin 0.00 (0.03) Unfavorable Return on Assets 0.01 (0.16) Unfavorable Return on Investment (ROI) 0.05 (1.04) Unfavorable INVESTMENT STATISTICS Earnings per Share (EPS) .60 (5.6) Unfavorable, net loss in revenue in 2000. Price/Earnings (P/E) ratio 10.28 (2.10) Unfavorable.
36. Amerisource Bergen Corp. Accounting for the Merger Year over Year comparison; 9/30/00 to 9/30/01. Current ratio – 1.32x to 1.36x, Favorable. A/R Turnover – 18.61x to 7.38x, Unfavorable with a caveat. Av. Collection Period – 19.62 days to 49.93 days, Unfavorable with a caveat. Inventory turnover – 7.39x to 3.13x, Unfavorable with a caveat.
37. ABC Accounting for the Merger Debt/Equity Ratio – 1.46x to 0.58x, Favorable. LTD/Assets – 0.17x to 0.16x, Favorable. Times Interest Earned – 3.37x to 3.71x, Favorable. Total Margin – 0.01x to 0.01x, No change in Favorability. Return on Assets (ROA) – 0.04x to 0.01x, Unfavorable with a caveat.
38. ABC Accounting for the Merger Return on Investment (ROI) – 0.35x to 0.04x, Unfavorable with a caveat. Earnings per Share (EPS) – 1.90x to 1.97x, Favorable. Price Earnings (P/E) ratio – 6.17x to 9.00x, Favorable and still cheap.
42. Analysis of the Merger Legal, Tax and Business Considerations
43. ABC Legal & Tax Considerations FTC resistance to possible anticompetitive move. FTC objection overcome because of history of drug price declines due to fierce competition. Purchase method of accounting. No tax impact to existing shareholders. Type A transaction, stock exchange with no cash.
44. ABC Business Considerations Both sets of shareholders benefitted. Bergen shareholders received a premium. The share price of the combined firms started an upward trend that continues today. AmeriSource Bergen became # 1. The new company continued to be competitive and innovative. The co. maintained their customer’s goodwill.
45. Successful or Failure? Very successful Resulting company, AmeriSourceBergen, largest of the Big Three pharmaceutical wholesalers in US (other two companies, McKesson, Cardinal Health) Estimated worth more than $275 billion in 2008 Note: The Big Three accounted for more than 100 buyouts, since 1980
46. Key Goals Achieved Captured increased market power from their horizontal merger, which allowed the company to achieve three key goals: Streamline online product ordering and account management Enable efficient customer support Create uniform user experience across entire supply chain
47. ABC Business Considerations Nominal cuts in sales force, no territory overlap Warehouses were centralized from 51 to 30. Laid-off employees were well-treated. Retained employees wre trained in new technology to improve productivity. Increased buying power used to customer’s advantage through low prices. Management concentrated on market share.
48. Impact on the Market “The US supply chain is set to undergo great changes in the next decade. Although a number of external factors will have an impact, the complex relationship between each of the parties in the supply chain will be the most important….they all wish to have greater control of the process of delivering medicines to patients.”
49. Impact on the Market Enhanced warehousing, distribution network Increased product offerings, lower costs Strengthened marketing function Increased supply chain efficiencies (SAP)