The AmeriSource Acquisition of Bergen Brunswig to form

Amerisource Bergen Corporation 

Presented byDavid Nordella and Victoria Pearson

 HSM 533 – Mergers and Acquisitions

Department of Health Services ManagementUniversity of La Verne

 Joan Branin, Ph.D.Professor and Dean

Fall TermNovember 2, 2010

 

Presentation OverviewIntroductionsHistory of Amerisource Health Corporation (suitor)History of Bergen Brunswig Corporation (acquired)Amerisource Bergen Corp. Post Merger Analysis

Key PlayersFinancial OverviewLegal ConsiderationsBusiness Considerations

SummaryQuestions

IntroductionsDavid NordellaVictoria Pearson

 

History ofAmeriSource Health

Corporation(NYSE: AHC)

(Suitor) 

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.

AHC History continuedEach 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.

AHC History continuedThe 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.

AHC History continuedOldco, 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.

AHC History continuedRetail 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.

AHC History continuedNew 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.

AHC History continuedAlco 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.

AHC History continuedAmeriSource 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.

AHC History continuedAmeriSource 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.

 History of

Bergen Brunswig Corporation(NYSE: BBC)

(Acquired) 

Bergen Brunswig Corp. (BBC) History

Started in early 1800sThree core business verticals

Pharmaceutical DistributionPharmericaOtherFunder: Lucien Brunswig, emmigrant – FranceApprentice druggist in USAStarted wholesale drug supply$350K revenue within 5-years

Bergen Brunswig Corp. (BBC) History

Partnerships and geographic expansion westDied 1943 before company’s explosive growthBergen acquired Brunwig 19691990s wave of consolidationMultiple sole distributorship agreementsColumbia/HAC Healthcare merger catalyst for

dominationExpanded to full service value added supplier

Multi media productProprietary catalogs and electronic ordering systems

BBC Recent Acquisitions

BBC Companies Sold

 

The Merger Resulting inAmerisource Bergen

Corporation(NYSE: ABC)

 

Motives for The MergerGreater 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.

Motives for the MergerCuts 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.

AHC & BBC Merger ProcessFocus 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 networkUpgrade to SAP

AHC & BBC Merger ProcessAccounted 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.

AHC & BBC MergerKey ParticipantsGoldman Sachs & Co. acted as advisor to

AmeriSource Health Corporation. Merrill Lynch, Pierce, Fenner & Smith, advisor to

Bergen BrunswigBoth parties retained Deloitte Consulting to assess

both, determine makeup integrated organization

 Financials Overview

 

AHC Accounting for the MergerAmeriSource 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.

AHC Accounting for the MergerDebt/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.

AHC Accounting for the MergerReturn 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!

AHC Financials

AHC Financials

BBC Accounting for the Merger 9/30/99

9/30/00

LIQUIDITYCurrent Ratio, Favorable 1.29 1.86

ACTIVITYAccounts Receivable Turnover 13.20 18.62Favorable trend, 141% increase in receivables turnover. Average Collection Period 27.66 19.60Favorable, improving by 71%Inventory Turnover 11.71 11.10The trend is Unfavorable.

BBC Accounting for the Merger 9/30/99 9/30/00

CAPITAL STRUCTUREDebt/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.

BBC Accounting for the Merger 9/30/99 9/30/00PROFITABILITYTotal Margin 0.00 (0.03)

Unfavorable Return on Assets 0.01 (0.16)

UnfavorableReturn on Investment (ROI) 0.05 (1.04)

Unfavorable

INVESTMENT STATISTICSEarnings per Share (EPS) .60 (5.6)

Unfavorable, net loss in revenue in 2000.Price/Earnings (P/E) ratio 10.28 (2.10)

Unfavorable.

BBC Financials

BBC Financials

Amerisource Bergen Corp. Accounting for the MergerYear 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.

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.

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.

ABC Financials

ABC Financials

Source: Amerisource Bergen 2010 Annual Report

ABC 2009 Financials

 Analysis of the Merger

Legal, Tax and BusinessConsiderations

ABC Legal & Tax ConsiderationsFTC 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.

ABC Business ConsiderationsBoth 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.

Successful or Failure?Very successfulResulting company, AmeriSourceBergen, largest of

the Big Three pharmaceutical wholesalers in US (other two companies, McKesson, Cardinal Health)

Estimated worth more than $275 billion in 2008Note: The Big Three accounted for more than 100

buyouts, since 1980

Key Goals AchievedCaptured 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 supportCreate uniform user experience across entire supply

chain

ABC Business ConsiderationsNominal cuts in sales force, no territory overlapWarehouses 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.

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.”

Impact on the MarketEnhanced warehousing, distribution networkIncreased product offerings, lower costsStrengthened marketing functionIncreased supply chain efficiencies (SAP)

Questions?

Contact UsDavid Nordella

CHA, Candidate

805.991.6001

dnordella@sbcglobal.net

Victoria Pearson

MHA, Candidate

626.278.1242

Victoriap@earthlink.net