Did Walgreens and Rite Aid benefit from their 2017 deal

Purpose- After several attempts that extended over two years, in 2017 the U.S. Federal Trade Commission approved Walgreens’ proposal to buy nearly half of Rite Aid stores. The two companies were in the same line of business making the merger fall in the category of horizontal mergers. The main benefits of horizontal mergers are cost savings from improved operational efficiency and superior bargaining power with respect to suppliers. Using annual financial statements, we examined the performance of Walgreens and Rite Aid over the four-year period since the acquisition of Rite Aid stores by Walgreens. The examination is useful because the Federal Trade Commission was not in favor of Walgreens’ earlier proposal to merge completely with Rite Aid, but later allowed it to buy almost half of Rite Aid stores. The present study examines whether the revised proposal benefitted both Walgreens and Rite Aid. Methodology- We collected annual financial statement data of the two companies from Mergent database and analyzed the common size statements and the relevant financial ratios. Findings- Analysis of profitability ratios indicate profit margins (gross as well as net) continued to decrease for both companies even after the acquisition. Both companies showed improved operational effeciency as reflected in Inventory turnover and employee productivity, but Walgreens had a superior performance. Conclusion- Only four years have passed since Walgreens acquired Rite Aid stores. Our analysis of the limited data indicates that Walgreen seems to have benefitted more from the deal. Rite Aid, by selling about 46% of its stores to Walgreens in 2017, became a much smaller company. The smaller size did not affect the cost of inventory or financing, but its profitability did not improve.