ArticlePDF Available

Abstract

The retail pharmacy industry is the primary source of prescription medication for Americans. It has transformed away from a cottage industry of independent pharmacies and consolidated toward chain drug stores and mail order. This trend, its causes and consequences, are not fully understood. We use secondary data to study a sample of 87 large acquisitions in the industry. Findings indicate that in spite of rapid growth, profitability eroded. Stock investors respond positively to merger and acquisition announcements for both acquiring and acquired firms and negatively for rival firms not party to such transactions. We also show that the concentration of the retail pharmacy industry is negatively correlated with producer prices and positively correlated with profitability. Our findings are consistent with a view that retail pharmacies are merging to create countervailing power for bargaining leverage with other parties in the supply chain. The capital market perceives these mergers positively and shareholders benefit from these transactions.
October/November 2014
Mergers and Acquisitions in U.S. Retail Pharmacy
PengCheng Zhu, Ph.D., CFA
Assistant Professor of Finance
School of Business Administration
University of San Diego
Peter E. Hilsenrath, Ph.D.
Joseph M. Long Chair in Healthcare Management and Professor of Economics
Eberhardt School of Business
Thomas J. Long School of Pharmacy & Health Sciences
University of the Pacific
Journal of Health Care Finance www.HealthFinanceJournal.com
2
Mergers and Acquisitions in U.S. Retail Pharmacy
Abstract
The retail pharmacy industry is the primary source of prescription medication for
Americans. It has transformed away from a cottage industry of independent
pharmacies and consolidated toward chain drug stores and mail order. This trend,
its causes and consequences, are not fully understood. We use secondary data to
study a sample of 87 large acquisitions in the industry. Findings indicate that in
spite of rapid growth, profitability eroded. Stock investors respond positively to
merger and acquisition announcements for both acquiring and acquired firms and
negatively for rival firms not party to such transactions. We also show that the
concentration of the retail pharmacy industry is negatively correlated with producer
prices and positively correlated with profitability. Our findings are consistent with a
view that retail pharmacies are merging to create countervailing power for
bargaining leverage with other parties in the supply chain. The capital market
perceives these mergers positively and shareholders benefit from these
transactions.
3
I. INTRODUCTION
There has been considerable scholarly interest in the pharmaceutical industry with
focus on relatively high prices and profit margins as well as mergers and
acquisitions (M&A’s) (Berndt, 2002; Danzon et al., 2012). Relatively less attention
has been paid to the retail pharmacy, a primary point of contact between the
consumer and their supply of most drugs. Chain drugs stores have evolved using
economies of scale and scope along with marketing prowess to squeeze out
smaller, more traditional retailers. The retail pharmacy also competes closely with
grocery stores, general goods merchandisers and mail order services.
The retail pharmacy in the United States has evolved over centuries. In colonial
North America, apothecaries compounded much of what they sold and were also a
ready source of diagnosis for a wide range of ailments (Cowen, 1976). By the later
19th and early 20th centuries, the dispensing function of pharmacists was largely
walled off from the diagnosis and treatment provided by physicians. This limited
inappropriate prescribing by physicians and allowed each occupation to better
specialize. Over time, the public’s contact with pharmacists diminished. Today,
most consumers hastily sign away their right to consultation with a pharmacist as
they pick up their prescription. Arguably pharmacists, aided with e prescriptions,
computerized adverse drug interaction tools, and wide-ranging automated
prepackaged medications serve more as quality assurance managers in the
production line of the retail pharmacy than as community healthcare providers.
Pharmacy benefit managers (PBMs) work to secure less costly prescription drugs for
insurers, employers and others. They commonly advocate mail order as a cost-
effective alternative. Mail order accounted for 17 percent of prescription sales in
2011 and market share has been increasing (IMS Institute for Healthcare
Informatics, 2012).
The purpose of this paper is to explore M&A’s in the retail pharmacy to identify
trends and determine if the retail pharmacy has conformed to the pattern of higher
prices for acquired firms and stable or falling share prices for acquiring firms. The
study also explores countervailing power as a motive for M&A as well as the impact
on the rival firms.
II. RETAIL PHARMACY AND NATIONAL HEALTH EXPENDITURES
Consumers obtain pharmaceuticals primarily in two different markets. One is
institutional, such as hospitals. The second is retail, consisting largely of chain
drugs stores, food stores, general merchandisers, mail order, and independent
pharmacies. Table 1 shows the breakdown in prescription drug spending by
dispensing location from 2007 to 2011. The dominance of retail is evident. Figure
1, shows growth of retail pharmaceutical spending as a share of National Health
Expenditures (NHE). Retail prescription drug spending consumed a similar
proportion of NHE half a century ago before widespread retail prescription drug
insurance benefits prevailed. The share fell as insurance for hospitals and physician
services advanced in the 1960’s and 70’s. It began to rise in the 1980’s with more
widespread pharmacy insurance benefits and development of new and expensive
4
drugs, especially in the 1990’s. The public sector, following the lead of the private
sector, began offering retail prescription drug benefits with implementation of the
Medicare Modernization Act in 2006. Figure 1 also projects allocation of retail
prescription drug spending declining to about 9 percent in 2020 (Keehan et al.,
2012). Greater use of low cost generics, soon to account for 85 percent of
prescription drug dispensing, is expected to help curb additional increases in the
share of NHE in spite of expansion of Medicaid and implementation of subsidized
health insurance exchanges (Cuckler et al., 2013). On the other hand, there is
growing concern about very costly new specialty drugs.
Table 1. Prescription Drug Dispensing in the United States by Location
Spending $BN
2007
2008
2009
2010
2011 (Market Share)
Total Market
280.5
285.7
300.7
308.6
319.9 (100%)
Retail
199.1
203.5
215.0
219.3
227.3 (71%)
Chain Stores
96.0
99.7
105.4
108.2
112.6 (35%)
Mail Service
44.1
46.5
51.0
51.8
55.1 (17%)
Independent
37.5
36.9
37.4
38.0
38.1 (12%)
Food Stores
21.5
20.4
21.2
21.3
21.5 (7%)
Institutional
81.4
82.1
85.7
89.3
92.6 (29%)
Clinics
32.7
33.0
34.8
36.8
38.4 (12%)
Non-Federal
Hospitals
26.4
26.8
27.6
28.1
28.3 (9%)
Long Term Care
13.3
13.7
13.9
14.8
15.2 (5%)
Federal Facilities
4.0
3.9
4.1
3.9
4.2 (1 %)
Home Health Care
2.5
2.5
2.6
2.6
2.8 (1%)
HMOs
1.5
1.3
1.7
2.1
2.7 (1%)
Miscellaneous
1.0
1.0
1.0
1.0
1.0 (0.3%)
Source: IMS Institute for Healthcare Informatics, 2012
Figure 1. Retail Prescription Drug Spending as a Share of National Health Expenditures in the
United States
5
Source: Center for Medicare & Medicaid Services
Growth of retail prescription drug spending, estimated at $918 per capita in 2012,
has underpinned growth of chain drug stores. The National Association of Chain
Drug Stores (NACDS) estimates there are about 41,000 pharmacies in the United
States operating in drug stores, supermarkets and mass merchandisers (2012).
This provides convenient proximity to pharmacists.
III. THE PHARMACY SUPPLY CHAIN, MARKET STRUCTURE AND PBMs
The pharmacy supply chain is a complex network of manufacturing, distributing,
managing and financing entities (Brooks et al., 2008). Drug manufacturers,
generic and branded, sell to drug wholesalers/distributers, pharmacies and PBMs
based on negotiated terms and/or volume discounts. Pharmacies, if not supplied
directly from the manufacturer, are supplied by wholesalers/distributers. In some
cases, group purchasing organizations negotiate with wholesalers on behalf of
pharmacies including those in hospitals. PBMs also directly supply pharmaceuticals
to customers using their mail order pharmacies. Payment may come directly from
the customer, but health insurance for pharmaceutical benefits is widespread.
Customer payments are commonly limited to copayments and deductibles. Third
party payment from government programs and private health insurers is often
provided in association with PBMs. Rebates are another important feature of this
market where manufacturer rebates to pharmacies, wholesalers/distributers and
PBMs are widespread and not very transparent. PBMs may also provide rebates to
6
insurers. Retail dispensing fees generally have not covered dispensing costs and
pharmacies rely on product pricing to offset cost and generate profit.
PBMs deserve special attention because of their growing importance in managing
pharmaceutical distribution, use and cost. PBMs are driving much of the structural
change in the industry. Their original purpose was claims processing and bill
payment as subcontractors to insurers and managed care organizations. However,
when prices of prescription drugs began to rise sharply in the 1980s, PBMs started
to function as prudent purchasers, serving as middlemen between drugs companies
and physicians, and negotiating to constrain costs (Congressional Budget Office,
2007). PBMs have considerable market power in negotiations with manufacturers,
insurers and retail pharmacies. Express Scripts merged with Medco in 2012 in spite
of resistance from the NACDS and others. The combined entity was estimated to
have a market share of 40 to 45 percent (Abelson and Singer, 2012).
By shifting customers to mail order, PBMs promise to more efficiently avoid adverse
drug interactions and other prescription errors. Automation and mail order,
especially for chronic conditions, can substitute for much of retail pharmacy
because many customers prefer convenient access to inexpensive drugs, not access
to community pharmacists.
IV. MERGERS AND ACQUISITIONS: THEORETICAL PERSPECTIVES
The new classical theory of mergers and acquisitions focuses on synergy created
between acquiring and target firms. The synergy can be generated from several
channels. First, the combined firms can gain market power and appropriate more
value from customers and suppliers after acquisitions (Prager, 1992). Second,
mergers and acquisitions can help enhance business efficiency. The combined firms
can reduce redundant investment and reduce business costs (McGuckin and
Nguyen, 1995). Mergers and acquisitions can facilitate redeployment of assets and
competency transfers to generate economies of scope (King et al., 2008). Third,
mergers and acquisitions are considered to be an important external corporate
governance mechanism to discipline inefficient managers. In an efficient market of
corporate control, firms with weak performance become vulnerable takeover
targets. Acquiring managers can increase shareholder’s value by replacing poor
management of target firms (Jensen, 1986). However, there is also a stream of
literature suggesting that mergers and acquisitions reduce shareholders’ value. It is
shown that managers make acquisitions due to over-confidence and hubris bias
(Roll, 1986). CEOs tend to overestimate their ability to turn around target firms,
and overpay target companies (Malmendier and Tate, 2008). Some managers
undertake merger deals for enhancing their private benefits. The “empire-building”
hypothesis predicts and finds empirical support that management compensation
generally increases, CEO discretion and power increases, and employment risk
decreases after merger deals (Harford and Li, 2007; Grinstein and Hribar, 2004,
Haleblian and Finkelstein, 1993).
It is also well-known that mergers and acquisitions usually take place in waves. The
M&A wave is a response to environmental or regulatory changes in the market.
Research has shown that environmental uncertainty increased the likelihood of
7
collaboration over acquisition (Duhaime and Schwenk, 1985; and Milliken, 1987).
Furthermore, it was found that highly diversified firms were more likely to pursue
acquisitions in decreasing environmental uncertainty, while the opposite occurred in
less diversified firms (Bergh and Lawless, 1998). Firms not able to shift strategy
with environmental changes are also more likely to make acquisitions (Thoronton,
2001). From the regulatory perspective, anti-trust deregulation and negotiation of
free-trade agreements among segmented markets leads to more acquisitions and
investment capital flows.
Mergers and acquisitions may also reflect the change in the competitive landscape
between the upstream industry and the downstream industry. The dynamics of
countervailing power between buyers and sellers was introduced by Galbraith
(Galbraith, 1952). Countervailing power refers to the balance of market power
between large organizations, often in vertical relationships. Welfare implications of
bilateral market power were explored by Pauly (1988). Theory suggests that buyers
may have incentive to consolidate in order to neutralize the market power of their
suppliers. Snyder (1996, 1998) suggests that mergers between buyers can increase
competition with colluding sellers, thereby allowing larger buyers to obtain lower
prices and increase profits. Recently, Bhattacharyya and Nain (2011) find support
of the countervailing power theory in a large sample of horizontal mergers and
acquisitions across industries in the US firms between 1984 and 2003. They find
strong evidence that buyer mergers can create market power and impact
performance of dependent suppliers. Their study shows that dependent suppliers
suffer large declines in their selling prices in the three years following major
downstream consolidation activity.
The theory of countervailing power may explain the current consolidation trend in
retail pharmacy. As pharmaceutical firms, PBMS and others gain market power,
retail pharmacies can be expected to offset that power through mergers and
acquisitions. This consolidation increases price pressure on suppliers and provides
more earning space for retail pharmacy.
The valuation consequence of mergers and acquisitions has been examined
extensively in the finance and business literature. Studies focusing on acquiring
firms suggest that, in general acquisitions do not enhance the value of firms making
acquisitions, both in the short-term as well as long-term. In fact, in several cases,
researchers found acquisitions eroded the value of the acquiring firm (King et al.,
2004; Seth et al., 2002). Studies focusing on target firms, on the other hand, find
the value of target firms is enhanced in general. This is not surprising given that
acquirers usually pay a premium to acquire targets. The third group of studies,
looking at effects of acquisitions on the combined entity, finds that overall value of
the combined entity is enhanced as a result of acquisitions (Carow et al., 2004;
Wright et al., 2002). A decomposition of combined gains however suggests that
target firms experienced the majority of gains while acquirers experienced neutral
or negative returns (Leeth and Borg, 2000).
Despite overwhelming evidence showing value reduction for acquiring firms, M&A’s
continue to dominate the corporate world. A merger announcement is often viewed
by managers as an indication of hyper competition. Consequently, rival firms either
8
want to be an insider to a merger event or try to prevent the merger from taking
place. A common assumption fueling such a dynamic is that M&A’s would be
harmful to competitors of the firm making an acquisition. This is in line with
efficiency and value enhancing mechanisms associated with M&A’s, creation of
market power, and generation of economies of scope through resource deployment
(Puranam and Srikanth, 2007). However, we do not have any empirical evidence in
the existing literature to validate that M&A’s are harmful to the rival firms.
This paper makes a few unique contributions to the literature. First, most M&A
studies focus on the general economy whereas we examine a particular industry.
We study the valuation consequence of M&A’s in the retail drug store and
proprietary store industry (Standard Industrial Code 5912) for three groups of
stakeholders: acquiring, target and competitor firms. Second, structural change in
retail pharmacy provides an opportunity to observe the dynamic relationship
between acquiring firms and competitors. There are very few studies that examine
both the M&A firms and their rivals (Gaur, Malhotra and Zhu, 2013). Third, we also
believe our study provides unique insights to practitioners in retail pharmacy as
well as for policy makers.
V. TRANSACTIONS DATA
Most chain pharmacy stores are publicly listed firms facilitating collection of M&A
transactions and financial information from publicly available secondary databases.
Specifically, we collected M&A transactions from the Thomson Financial database.
The Thomson Financial database is a standard M&A data source that has been
extensively used in finance and business research. We focus on acquisitions with
deal values exceeding 10 million US dollars. All acquisitions in our sample involve
U.S. domestic target firms and acquiring firms in the retail-drug stores and
proprietary stores industry. The acquisition status is recorded as either
“completed” or “withdrawn” in the database. Finally, in order to examine the
financial consequence of M&A transactions, we also require acquiring firm’s financial
data found in databases of the Center for Research in Security Prices (“CRSP”) and
Compustat. A total of 87 transactions were reviewed but 9 were cancelled. The final
sample contains 78 completed M&A transactions between year 1981 and 2009. A
list of the detailed transactions can be found in the Appendix. The total transaction
value of the M&A sample is about 62 billion US dollars and the median transaction
value is about $60 million US dollars. Out of the 78 acquisitions, 46 percent were
made within the industry (acquiring and target firms are both chain pharmacy
companies); and 54 percent of acquisitions diversified into other industries. About
23 percent of the deals acquired private firms and only 22 percent of the deals were
paid by pure cash.
VI. METHODS
We adopt standard event study methodology (to analyze valuation impact of
mergers and acquisitions on acquiring firms, target firms and rival firms (Brown and
Warner, 1985). We collected daily stock prices for acquiring, target and rival firms
around merger announcement dates. We used the capital asset pricing model to
calculate cumulative abnormal returns for sample firms. We coded the
9
announcement date as t0. We calculated abnormal returns for different time
windows. Here, we employ the event window t-2 to t+2 (i.e., two days before and
two days after the announcement date). Abnormal return can be calculated as:
ARj,t = Rj,t (α + β * Rm,t)
where ARj,t is the abnormal return, Rj,t is the acquiring firm’s daily stock return, Rm,t
is the daily stock-market return (i.e., value weighted CRSP stock index). The
market model parameters, α and β, are estimated from the date of t- 256 to t-64 (i.e.,
256 days to 64 days) before the announcement date. We added daily abnormal
returns to measure cumulative abnormal returns (CAR) for acquiring firm j during
the five-day period (-2, +2) surrounding the acquisition announcement.
  


To confirm the robustness of our findings, we conducted the analysis using multiple
announcement windows, such as t (-1, +1) and t (-1, 0). We also follow Schwert
(1996) to calculate abnormal returns in the stock return run-up period: t (-63, -1),
the post-acquisition period t (0, +126), and the entire M&A event window t (-63, +
126).
We used the same market model to calculate cumulative abnormal returns for each
rival firm in the industry, noted as CARr,i. Specifically, for each acquisition
announcement, we calculated abnormal returns for all rival firms in the acquiring
firm’s industry during the five-day event window. This resulted in 911 CAR
observations in our rival firm sample. Abnormal returns of the rival firms cannot be
considered independent observations according to Song and Walkling (2000),
because rival firms in the same industry react to an acquisition announcement at
the same time. To correct for this cross-sectional dependence problem, we adopted
the procedure suggested by Song and Walkling and grouped the rival firms’ CARs
into industry portfolios. Each portfolio of CARs of rival firms is the average of the
CAR of the individual rival firm in each industry after an acquisition announcement.



where CARr,i is the cumulative abnormal return for a rival firm r in industry i, N is
the number of rival firms in industry i, and CARp,i is the abnormal returns of the
rival firm portfolio, which is essentially average abnormal returns of each rival firm
in the industry portfolio. There are 87 industry rival firm portfolios corresponding to
87 acquisition announcements (both completed and withdrawn deals) made during
the study period. We use a t test to examine whether the rival firms’ reaction to the
focal firm’s M&A announcement is significantly different from zero or not. The
dataset contains both existing firms as well as delisted firms due to takeovers,
bankruptcy, privatization, or other reasons. Thus, there should be little survival
10
bias.
VII. RESULTS
First, we aggregate the firms’ sales for the last thirty years. According to the
Compustat database, from 1980 to 2010, publicly listed retail chain pharmacy firms
increased sales from 4.8 million USD to 236 million USD, yielding an average
annual growth rate of 20 percent. In spite of size and growth, the profitability ratio
did not increase. Industry profitability (i.e., industry average return on assets)
dropped 50 percent since the early 1980’s.
We correlate the Herfindahl index with the Bureau of Labor Statistics producer price
index for pharmacies and drug stores and the industry ROA ratio in each year
between 1990 and 2011. Our results in Table 2 show a significant and negative
relationship between the market concentration measures and the producer price
index data. The industry concentration measures are also found to be positively
correlated with industry profitability in the 21 year sampling period. These results
confirm the importance of analyzing the consolidation trend of the retail pharmacy
industry. As the retail pharmacy industry consolidates, price pressure is exerted on
suppliers. Our results are consistent with findings about countervailing power in
Bhattacharyya and Nain (2011). A chronological list of M&As with transaction
values is shown in Table 3.
Table 2. Correlation of industry concentration, producer price index and industry profitability
Pearson Correlation
[1]
[2]
[3]
[4]
[1]
Herfindahl Index
1
[2]
Top 2 Firms' Market
Shares
0.899***
1
[3]
Producer Price Index
-0.779***
-0.501**
1
[4]
Industry Return on Assets
0.777***
0.699***
-0.771***
1
*** 1% significance, ** 5% significance.
11
Table 3. Retail Pharmacy Mergers and Acquisitions
Source: SDC Thomas Financial database
VIII. VALUATION IMPACT OF MERGERS AND ACQUISITIONS
Table 4 shows results for acquiring, target firms and their rivals in M&A’s. We
examine both acquisitions that were successfully completed after the
announcements and acquisitions that were not successful and were subsequently
cancelled by acquiring firms. In our sampling period, there are 78 completed
acquisitions and 9 cancelled acquisitions.
12
Table 4. Announcement Returns for Acquiring Firms, Target Firms and Rival Firms in the
Acquiring Industry
*** 1% significance, ** 5% significance, * 10% significance.
Table 4 shows that the 5-day CAR in the two days before and two days after the
acquisition announcement is about +2.6 percent for completed deals. The average
CAR is positive and statistically significant at 5%. The median CAR statistic is 2.4
percent, which is very close to the mean value suggesting results are not affected
by outliers. In addition, the robustness tests using different announcement
windows, such as CAR (-1, +1), and CAR (-1, 0), lead to the same conclusions. We
find the stock market reacted positively to acquiring firms’ M&A announcements. In
other words, M&A deals increased value for acquiring firms.
We do not find the same positive announcement returns for cancelled deals.
Actually for a longer time window, we found the stock price of unsuccessful
acquiring firm’s dropped by 36.8% (compared to a median stock price drop of 16.8
percent) (63 days before acquisition to 126 days after acquisition). Such large
negative returns are mainly concentrated in the post announcement period, and it
is most likely due to the disappointing news of canceled deals.
We also examine the announcement impact on target firms. We note that the
sample size for the target firms is much smaller as some target firms were private
and did not provide stock price data to calculate the CAR measure. Not surprisingly,
target firms on average experienced 28.4 percent increase in shareholders’ value
during the five-day window around the M&A announcements. The CARs are positive
and statistically significant at 1 percent for each of the announcement windows as
well as the run-up period (-63 day to -1 day) and the post-acquisition period (0 to
Event Study
Cumulative Abnormal Returns N Mean Median Std. Dev. t value N Mean Median Std. Dev. t value
Panel A. Acquiring firms stock performance [event day range]
ACAR[-63,-1] 9 .008 .002 .261 .092 78 .046 .019 .416 .984
ACAR[0,126] 9 -.376 -.113 .535 -2.110 78 .030 .028 .645 .412
ACAR[-63,126] 9 -.368 -.168 .453 -2.439 ** 78 .076 -.035 1.003 .673
ACAR[-1,+1] 9 .072 .055 .162 1.332 78 .024 .015 .104 2.040 **
ACAR[-2,+2] 9 .101 .064 .215 1.407 78 .026 .024 .105 2.187 **
ACAR[-1,0] 9 .050 .025 .111 1.353 78 .018 .007 .078 1.977 *
Panel B. Target firms stock performance [event day range]
TCAR[-63,-1] 6 .145 .082 .293 1.207 16 .269 .207 .373 2.888 **
TCAR[0,126] 6 .123 .147 .319 .945 16 .276 .250 .232 4.757 ***
TCAR[-63,126] 6 .268 .026 .514 1.276 16 .545 .504 .539 4.042 ***
TCAR[-1,+1] 6 .034 .072 .095 .874 16 .255 .249 .256 3.995 ***
TCAR[-2,+2] 6 .077 .060 .085 2.213 * 16 .284 .266 .273 4.157 ***
TCAR[-1,0] 6 .051 .043 .071 1.742 16 .234 .204 .257 3.648 ***
Panel C. Rivals of Acquiring firms stock performance [event day range]
RCAR[-63,-1] 9 .003 .005 .092 .087 78 -.001 .007 .084 -.112
RCAR[0,126] 9 .076 .010 .158 1.446 78 -.027 -.007 .144 -1.672
RCAR[-63,126] 9 .063 -.001 .206 .925 78 -.014 .029 .203 -.588
RCAR[-1,+1] 9 .003 .006 .012 .623 78 -.003 -.004 .013 -1.757 *
RCAR[-2,+2] 9 .009 .008 .012 2.214 * 78 -.004 -.003 .013 -2.663 ***
RCAR[-1,0] 9 .002 .000 .011 .468 78 -.005 -.006 .019 -2.215 **
Cancelled Acquisitions
Completed Acquisitions
13
+126 day). According to Schwert (1996), the CAR (-63, +126) can be used as a
proxy measure of acquisition premium. This measure yields an average acquisition
premium paid in the sample of 54.5 percent. We do not find consistent results for
cancelled acquisitions.
In addition to the valuation impact on participating firms in mergers and
acquisitions, we extend the event study to rival firms in the industry. For each of
the completed M&A announcements, we calculate the CARs of rival firms during the
announcement time window. We then take the average of the rival CARs for each
M&A event and show mean and standard deviation of the sample average rival
firms’ CARs in Table 3 (Panel C).
We find that on average rivals of the acquiring firms lose 0.4 percent of stock value
upon the M&A announcements during the 5-day window. This announcement return
is statistically significant at the 5 percent level. The average market capitalization of
rival firms in the sample is around $3.5 billion and the -0.4 percent valuation
impact results in a loss of about $14 million dollars per rival firm. This valuation
impact is not only statistically significant, but also economically significant. It
suggests that rival firms not consolidating may face lower profit margins and less
opportunity to grow and survive. The market and investors signal pessimism about
the future of rival firms. This evidence further supports our view that consolidation
to achieve economic scale and scope and market power is a driving force in the
industry. Interestingly, for the cancelled acquisitions, we find that the average
announcement returns of the rival firms are positive and marginally significant at
10 percent for the (-2, +2) event window. This evidence suggests that the rival
firms’ survival rate may increase if the focal acquisition fails.
VIII. CONCLUSION
We find that M&As create value for both acquiring and target firms in the retail
chain pharmacy industry. We also show that the concentration of the retail
pharmacy industry has negative impact on the Producer Price Index and positive
impact on the profitability of the industry. This supports a defensive strategy
hypothesis associated with countervailing power. Investors in the financial market
seem to agree that consolidating, gaining market power and increasing efficiency
through mergers and acquisitions is an essential and effective business strategy to
survive in the industry. We also find that competitors of acquiring firms were
affected negatively by M&A announcements. Our view is that defensive
consolidation is a driving force. Profitability levels have not generally increased but
consolidation defends against erosion of profits. Other explanations for M&A also
exist. Perhaps ownership is shifting to more efficient management. Or economies
of scale and scope may be motivating factors. More research is needed to better
explore reasons for M&A in retail pharmacy.
The market structure of the retail pharmacy is very pertinent to the effectiveness
and efficiency of the US healthcare system. There is expectation that pharmacists
will enjoy a wider scope of practice going forward. The availability of pharmacy
services will take on different dimensions in the future beyond dispensing of
prescription drugs. Pharmacists will become part of a more integrated fabric of
14
medical care with wider networks of primary care providers as well as more
complex hospital systems. It is not clear how industry consolidation will affect the
healthcare and health of Americans. But it is another topic worthy of research.
15
REFERENCES
Abelson, R., & Singer, N. 2012. FTC approves merger of 2 of the biggest pharmacy benefit
managers. New York Times, April 2, 2012, accessed December 12, 2012
http://www.nytimes.com/2012/04/03/business/ftc-approves-merger-of-express-scripts-and-
medco.html?ref=medcohealthsolutionsinc&_r=0
Bhattacharyyaa, S. and Nain, A. 2011. Horizontal acquisitions and buying power: A product
market analysis. Journal of Financial Economics, 99(1): 97115.
Bergh, D. D., & Lawless, M. W. 1998. Portfolio restructuring and limits to hierarchical
governance: The effects of environmental uncertainty and diversification strategy. Organization
Science, 9: 87-102.
Berndt, E. 2002. Pharmaceuticals in U.S. health care: Determinants of quantity and price.
Journal of Economic Perspectives, 16 (4): 45-66.
Brooks, J., Doucette, W., Wan, S., & Klepser, D. 2008. Retail pharmacy market structure and
performance. Inquiry, 45 (1): 75-88.
Brown, S. J., & Warner, J. B. 1985. Using daily stock returns: The case of event studies. Journal
of Financial Economics, 14: 3-31.
Carow, K., Heron, R., & Saxton, T. 2004. Do early birds get the returns? An empirical
investigation of early-mover advantages in acquisitions. Strategic Management Journal, 25:
563-585.
Congressional Budget Office. 2007. Prescription drug pricing in the private sector. Available at
http://www.cbo.gov/publication/18275 accessed June 3, 2013.
Cowen, D. 1976. The foundations of pharmacy in the United States. Journal of the American
Medical Association, 236 (1): 83-87.
Cucker, G.A., Sisko, A.M., Keehan, S.P., Smith, S.D., Madison, A. J., Poisal, J.A, Wolfe, C.J.,
Lizonitz, J.M. and Stone, D.A. 2013. National Health Expenditure Projections, 2012-22: Slow
Growth Until Coverage Expands and Economy Improves. Health Affairs 32 (10): 1820-1831.
Danzon, P., Epstein, A. & Nicholson, S. 2004. Mergers and acquisitions in the pharmaceutical
and biotech industries. National Bureau for Economic Research. Working Paper 10536
http://www.nber.org/papers/w10536, accessed November 27, 2012.
Duhaime, I. M., & Schwenk, C. R. 1985. Conjectures on cognitive simplifications in acquisition
and divestment decision making. Academy of Management Review, 10: 287-295.
16
Galbraith, J.K. 1952. American capitalism: The concept of countervailing power. Boston:
Houghton Mifflin.
Gaur, A. S., Malhotra, S. & Zhu, P. 2013. Acquisition announcements and stock market
valuations of acquiring firms' rivals: A test of the growth probability hypothesis in China.
Strategic Management Journal, 34: 215232.
Grinstein, Y., & Hribar, P. 2004. CEO compensation and incentives: Evidence from M & A
bonuses. Journal of Financial Economics, 73: 119-143.
Haleblian, J., & Finkelstein, S. 1993. Top management team size, CEO dominance, and firm
performance - the moderating roles of environmental turbulence and discretion. Academy of
Management Journal, 36: 844-863.
Harford, J., & Li, K. 2007. Decoupling CEO wealth and firm performance: The case of acquiring
CEOs. Journal of Finance, 62: 917-949.
IMS Institute for Healthcare Informatics. 2012. The use of medicines in the United States:
review of 2011, available at
http://www.imshealth.com/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcar
e%20Informatics/IHII_Medicines_in_U.S_Report_2011.pdf, accessed on June 3, 2013.
Jensen, M. C. 1986. Agency costs of free cash flow, corporate finance, and takeovers. American
Economic Review, 76: 323-329.
Keehan, S., Cucler, G., Sisko, A., Madison, A., Smith, S., Lizonitz, J., Poisal, J., & Wolfe, C. 2012.
National health expenditure projections: Modest annual growth until coverage expands and
economic growth accelerates. Health Affairs, 31 (7): 1600-1612.
King, D. R., Dalton, D. R., Daily, C. M., & Covin, J. G. 2004. Meta-analyses of post-acquisition
performance: Indications of unidentified moderators. Strategic Management Journal, 25: 187-
200.
King, D. R., Slotegraaf, R. J., & Kesner, I. 2008. Performance implications of firm resource
interactions in the acquisition of R&D-intensive firms. Organization Science, 19: 327-340.
Leeth, J. D., & Borg, J. R. 2000. The impact of takeovers on shareholder wealth during the 1920s
merger wave. Journal of Financial and Quantitative Analysis, 35: 217-238.
Malmendier, U., & Tate, G. 2008. Who makes acquisitions? CEO overconfidence and the
market's reaction. Journal of Financial Economics, 89: 20-43.
McGuckin, R. H., & Nguyen, S. V. 1995. On productivity and plant ownership change: New
evidence from the Longitudinal Research Database. Rand Journal of Economics, 26: 257-276.
17
Milliken, F. 1987. Three types of perceived uncertainty about the environment: State, effect
and response uncertainty. Academy of Management Review, 12: 133-143.
National Association of Chain Drug Stores, 2012. Pharmacies. The face of neighborhood
healthcare, available at http://www.nacds.org/aboutus/industry.aspx, accessed June 3, 2013.
Pauly, M.V. 1988. Market power, monopsony, and health insurance markets. Journal of Health
Economics, 7 (2): 111-128.
Prager, R. A. 1992. The effects of horizontal mergers on competition: The case of the Northern
Securities Company. Rand Journal of Economics, 23: 123-133.
Puranam, P., & Srikanth, K. 2007. What they know vs. what they do: How acquirers leverage
technology acquisitions. Strategic Management Journal, 28: 805-825.
Roll, R. 1986. The hubris hypothesis of corporate takeovers. Journal of Business, 59: 197-216.
Schwert, G. W. 1996. Markup pricing in mergers and acquisitions. Journal of Financial
Economics, 41: 153-192.
Seth, A., Song, K. P., & Pettit, R. R. 2002. Value creation and destruction in cross-border
acquisitions: An empirical analysis of foreign acquisitions of US firms. Strategic Management
Journal, 23: 921-940.
Snyder, C.M. 1996. A dynamic theory of countervailing power, Rand Journal of Economics, 27:
747-769
Snyder, C.M. 1998. Why do large buyers pay lower prices? Intense supplier competition,
Economic Letters, 58: 205-209
Song, M. H., & Walkling, R. A. 2000. Abnormal returns to rivals of acquisition targets: A test of
the 'acquisition probability hypothesis'. Journal of Financial Economics, 55: 143-171.
Thornton, P. H. 2001. Personal versus market logics of control: A historically contingent theory
of the risk of acquisition. Organization Science, 12: 294-311.
Wright, P., Kroll, M., Lado, A. & van Ness, B. 2002. The structure of ownership and corporate
acquisition strategies. Strategic Management Journal, 23: 41-53.
18
Appendix Mergers and Acquisitions in the Retail Pharmacy Industry (1981 2009)
Date
Announced
Date
Withdrawn
Acquirer Name
Target Name
Value of
Transaction
($mil)
01/27/81
Gray Drug Stores Inc
Drug Fair Group Inc
33.70
03/03/81
Jack Eckerd Corp
American Home Video Corp
94.75
07/13/81
Melville Corp
Kay-Bee Toy & Hobby Shops
Inc
64.20
07/18/83
Omnicare Inc
CR Bard Inc-Inspiron Division
21.00
12/07/83
Pay'n Save Inc
Schuck's Auto Supply Inc
56.68
03/24/86
Thrifty Corp
Guild Inc
13.62
05/01/87
Rite Aid Corp
Gray Drug Fair(Sherwin-
Willms)
120.00
08/17/88
Rite Aid Corp
Begley Co
18.86
06/25/90
Melville Corp
Peoples Drug Stores(Imasco)
330.00
07/02/90
Melville Corp
Circus World Toy Stores-Assets
88.25
02/06/91
Fay's Inc
Carl's Drug Co
30.00
06/03/91
Melville Corp
Foot Action Inc
46.00
10/23/91
Omnicare Inc
Langsam Nursing Pharmacy
Inc
24.40
10/30/91
01/09/92
Rite Aid Corp
Revco DS Inc(Anac
Hlding)(OLD)
738.95
02/11/92
Omnicare Inc
Pharmacare,Pharmacare IV
Svcs
25.00
05/05/92
Rite Aid Corp
Hannaford Bros-34 Wellby Strs
30.00
10/14/92
Omnicare Inc
Westhaven Pharmacy
17.90
04/08/93
Omnicare Inc
Clar-Ron Inc
13.50
06/21/93
Perry Drug Stores Inc
ALP Acquisition LP-11 AL Price
10.80
07/21/93
Longs Drug Stores Corp
Bill's Drugs Inc
12.00
11/16/93
01/11/94
Perfumania Inc
Prestige Fragrance &
Cosmetics
45.52
12/02/93
Omnicare Inc
Enloe Drugs Inc
11.80
03/16/94
05/11/94
Pharmhouse Corp
All For A Dollar Inc
12.33
05/02/94
Rite Aid Corp
LaVerdiere's Enterprises Inc
50.00
05/31/94
Omnicare Inc
Evergreen Pharmaceutical Inc
43.90
06/30/94
Omnicare Inc
Lo-Med Prescription Services
11.78
08/16/94
Perfumania Inc
FoxMeyer-Fragrance Inventory
10.80
12/27/94
Rite Aid Corp
Perry Drug Stores Inc
131.46
02/01/95
Pharmhouse Corp
FW Woolworth-Rx Place Disco
Dr
37.00
02/21/95
Health Management Inc
Caremark Intl-Clozaril Patient
24.00
05/16/95
Omnicare Inc
Specialized Pharmacy Services
10.73
19
06/21/95
Rite Aid Corp
Pathmark-Drug Stores(30)
63.60
06/28/95
Eckerd Corp
Rite Aid Corp-Drug Stores(109)
75.00
08/07/95
08/31/95
Perfumania Inc
Cosmetic Center Inc
56.68
09/05/95
Omnicare Inc
Rite Aid Corp-Nursing Home
10.00
10/23/95
Drug Emporium Inc
F & M Distributors Inc-Stores
39.00
11/29/95
04/24/96
Rite Aid Corp
Revco DS Inc
2,126.82
05/06/96
Drug Emporium Inc
Eagleville Pharmacy-I Got It
11.00
06/24/96
Capstone Pharmacy
Services Inc
Symphony Pharmaceuticals Inc
150.00
09/09/96
04/02/97
Phar-Mor Inc
ShopKo Stores Inc
1,050.63
10/14/96
Rite Aid Corp
Thrifty Payless Holdings Inc
2,393.96
11/07/96
NCS HealthCare Inc
Clinical Health Systems
14.87
01/03/97
Capstone Pharmacy
Services Inc
Portaro Pharmacies Inc
20.58
01/07/97
Capstone Pharmacy
Services Inc
Clinical Care Health Care Svcs
20.32
01/27/97
CVS Corp
Revco DS Inc
3,911.71
01/29/97
Omnicare Inc
Coromed Inc
15.00
04/16/97
Capstone Pharmacy
Services Inc
Pharmacy Corp of America Inc
862.50
08/11/97
Capstone Pharmacy
Services Inc
Med-Tec Pharmaceutical
16.30
08/14/97
Omnicare Inc
American Medserve Corp
233.18
02/09/98
CVS Corp
Arbor Drugs Inc
1,475.09
02/23/98
Omnicare Inc
CompScript Inc
68.39
03/31/98
Omnicare Inc
IBAH Inc
154.26
07/30/98
Omnicare Inc
United Professional Cos
254.69
08/05/98
Duane Reade Inc
Rockbottom Stores
61.00
08/19/98
PharMerica Inc
Natl Insitutional Pharm Svcs
20.90
11/17/98
Rite Aid Corp
PCS Health Systems
1,500.00
12/17/98
Phar-Mor Inc
Pharmhouse Corp
35.05
01/04/99
Drug Emporium Inc
VIX Drug Store(Tops Markets)
32.50
05/17/99
CVS Corp
Soma.com
30.00
09/15/99
Longs Drug Stores Corp
Rite Aid Corp-CA Stores(38)
186.00
01/14/00
02/22/00
Perfumania.com Inc
Biz2Net Corp
111.60
03/16/00
Healthcentral.com Inc
Vitamins.com
98.98
07/05/00
CVS Corp
Stadtlander Drug Co(Counsel)
124.00
07/25/00
Healthcentral.com Inc
Drugemporium.com
13.10
12/06/01
Omnicare Inc
American Pharmaceutical Svcs
115.00
07/29/02
Omnicare Inc
NCS HealthCare Inc
341.37
06/17/03
Omnicare Inc
Sunscript Pharmacy Corp
90.00
03/22/04
Drugmax Inc
Familymeds Group Inc
49.34
20
04/05/04
CVS Corp
JC Penney-Eckerd,TX & FL
2,150.00
05/24/04
Omnicare Inc
NeighborCare Inc
1,820.72
02/23/05
Medco Health Solutions
Inc
Accredo Health Inc
2,192.12
07/01/05
Omnicare Inc
RxCrossroads LLC
235.00
07/11/05
Omnicare Inc
ExcelleRx Inc
268.75
07/21/05
Express Scripts Inc
Priority Healthcare Corp
1,268.19
04/12/06
Longs Drug Stores Corp
Network Pharmaceuticals-(22)
10.00
08/16/06
Omnicare Inc
Rainier Home Health Care
14.00
08/24/06
Rite Aid Corp
Jean Coutu Group(PJC)USA Inc
3,470.00
11/01/06
CVS Corp
Caremark Rx Inc
26,293.58
12/18/06
03/16/07
Express Scripts Inc
Caremark Rx Inc
24,948.19
02/15/07
Walgreen Co
Familymeds Grp Inc-Pharmacy
As
60.00
07/02/07
Walgreen Co
Option Care Inc
967.24
08/28/07
Medco Health Solutions
Inc
PolyMedica Corp
1,279.17
12/21/07
E Com Ventures Inc
Model Reorg Inc
141.25
06/13/08
Express Scripts Inc
Medical Services Co Inc-Pharm
248.00
08/12/08
CVS Caremark Corp
Longs Drug Stores Corp
2,637.42
09/12/08
10/08/08
Walgreen Co
Longs Drug Stores Corp
2,785.35
04/13/09
Express Scripts Inc
NextRx Inc
4,675.00
Source: Thomson Financial database.
... These trends include increasing self-care movement, growth in complementary and alternative therapies, greater use of social media and technology, and more recently, the use of artificial intelligence, the use of grocery shopping and home deliveries including drone deliveries, and the online marketplace with Amazon's recent foray into the health care market. [1][2][3][4] All of these trends have implications that affect the quality of patient experiences with health care providers. Providing optimal health care requires attention to the triple aims of health care delivery. ...
Article
Full-text available
Our objective is to suggest a revised model of health care delivery that emphasizes human connections in patient care and describes the role of pharmacists within the model. Improving the quality of patient experiences is one of the triple aims of health care delivery. Using the patient-centered medical home (PCMH) model as the basis, we describe an enhanced delivery model that adopts Maslow's hierarchy of needs and addresses the current deficiencies of the PCMH model. The model envisions the creation of "community centers for engagement" that employ patient care advocates and health care practitioners who work together in an interdisciplinary manner to improve the quality of patient care experiences. Pharmacists' roles in these centers of engagement are outlined based on Maslow's hierarchy of needs. The model aims to enhance patient-provider interactions and allow pharmacists to play a pivotal role in meeting patients' needs with the goal of developing a self-actualized patient.
... The synergy observed among the companies merged may occur in various ways. For example; the companies merged may obtain the market power; the mergers or acquisitions may increase the work efficiency; may decrease the unnecessary investments and enterprise costs or may be seen as external corporate management mechanism in order to discipline the inefficient managers (Zhu and Hilsenrath, 2015). For the pharmaceutical companies, the most significant merger cause observed among the companies merged is that a pharmaceutical company does not want to International Journal of Business and Management Vol. ...
Article
Full-text available
Until the begining of 1990s, firms had been looking ways to attain the competitive advantage and increase their profitabilites depending on it by realizing economies of scale or benefiting from market failure. Nowadays, with the impact of globalization, particularly great companies have started to purchase other firms or merge with them as a growth strategy. Pharmaceutical industry has the first place where the mergers and acquisitions occur mostly. Among the drives that leads pharmaceutical firms to mergers or acquisitions; high costs of research and development, economies of scale, motivation for new markets, efforts to improve the existing marketing possibilities, trying to keep up with competition can be counted. The aim of this study is to discuss mergers and acqusisitions in pharmaceutical sector and to evaluate global pharmaceutical industry in this terms.
Article
This paper examines the financial performance of all mergers and acquisitions (M&A) involving publicly traded companies that occurred in the U.S. generic drug industry from 1996 to 2017. The control group was chosen using a nearest neighbor matching procedure. Our empirical strategy controls for unobservable firm‐specific fixed effects as well M&A fixed effects. Our findings suggest that profit levels do not change significantly following M&As, but total revenues decline after M&As. Firms undergoing an M&A cut operating expenses but not through reduction in labor expenses or number of employees.
Article
Bu calismanin amaci, Turkiye’de ilac sektorunde son yillarda yasanan stratejik ortaklik, birlesme ve satin alma islemlerinin kavramsal cercevesi ve sebeplerini incelemektir. Calismanin diger bir amaci ise, 2006-2014 yillari arasinda gerceklesen islemlerin genel bir durum tespitini yaparak, konunun gelecekteki gorunumunu Turkiye acisindan degerlendirmektir. Price Waterhouse Coopers (2006-2009 raporu), Ernst & Young (2009-2014 raporlari) ve Deloitte (2008-2014 raporlari) verilerine dayanan calisma, 2006-2014 yillari arasinda Turkiye ilac sektorunde butun islemlerin satin alma seklinde gerceklestigi ve birlesme olmadigini gostermektedir. Toplamda 38 satin alma faaliyetinin %71’inin yabanci ulkeler tarafindan yapildigi ve ilac sirketlerinin genellikle Avrupa ulkeleri tarafindan satin alindigi saptanmistir. Ilac sektorunde stratejik ortakliklar ile ilgili bir rapor olmadigindan, veriler “Google” arama motorunda internet haberleri icerik analizi yapilarak elde edilmistir. Icerik analizi, 18 stratejik ortakligin Italya, Rusya, Cezayir, ABD, Belcika, Japonya, Danimarka ve Suudi Arabistan tarafindan gerceklestirildigini gostermektedir. Sonuc olarak, ilac sektorunde fiyat duzenlemeleri ve yerli jenerik ilac uretimi ile ilgili daha kapsamli politikalara ihtiyac duyulmaktadir. Satin alma ve stratejik ortaklik egiliminin saglik sektorunun hizmet sunumu tarafinda da (hastane, tip merkezi vb.) incelenmesi onerilmektedir.
Article
Full-text available
This paper develops and tests a theory of the historical contingency of the risk of acquisition using data from the higher education publishing market from 1958-1990. Interviews and historical analyses are combined to identify two forms of capitalism--personal and market, and in particular to publishing, to identify the institutional logics identified with each form of capitalism (an editorial and a market logic). Hazard-rate models are used to test for differences in the effects of these two logics on the organization and market determinants of acquisition. Publishers with relational network forms of organization in production and distribution were at a higher risk of acquisition in the market period but not in the editorial period. Competition in the product market increased the risk of acquisition in the market period, but not the editorial period. The covariates explaining the risk of acquisition change as a consequence of the evolution of capitalism and as a result of a firm's strategic and structural conformity with the institutional logic of the prevailing form of capitalism.
Article
Full-text available
To examine the impact of acquisition announcements on the stock market returns of rivals of the acquiring firms, we propose a growth probability hypothesis: When an acquisition is announced, it signals the potential for future growth in the acquirer’s industry to the market, resulting in positive stock market reactions to rivals of the acquiring firms. We test the growth probability hypothesis with a longitudinal sample of Chinese domestic and cross-border acquisitions during 1993-2008. The results provide robust support for this hypothesis as a means to explain market reactions to rivals of acquiring firms. We also empirically test and negate alternative theoretical explanations advanced in prior literature to explain positive market reactions to rivals of the target firms.
Article
Adopting an information-processing perspective and drawing on work in social psychology, this study examined the effects of top management team size and chief executive officer (CEO) dominance on firm performance in different environments. Data from 47 organizations revealed that firms with large teams performed better and firms with dominant CEOs performed worse in a turbulent environment than in a stable one. In addition, the association between team size and CEO dominance, and firm performance, is significant in an environment that allows top managers high discretion in making strategic choices but is not significant in a low-discretion environment.
Article
Acquisition and divestment decision situations generally are characterized by complexity and ambiguity. This paper proposes the idea that business decision makers may use cognitive simplifying processes in defining such ill-structured problems. A number of specific simplifying processes that may be used in acquisition and divestment are discussed. These ideas are supported by examples from recent field research and the business press. Impacts on resulting decisions are discussed; future research directions are suggested.
Article
Health spending growth through 2013 is expected to remain slow because of the sluggish economic recovery, continued increases in cost-sharing requirements for the privately insured, and slow growth for public programs. These factors lead to projected growth rates of near 4 percent through 2013. However, improving economic conditions, combined with the coverage expansions in the Affordable Care Act and the aging of the population, drive faster projected growth in health spending in 2014 and beyond. Expected growth for 2014 is 6.1 percent, with an average projected growth of 6.2 percent per year thereafter. Over the 2012-22 period, national health spending is projected to grow at an average annual rate of 5.8 percent. By 2022 health spending financed by federal, state, and local governments is projected to account for 49 percent of national health spending and to reach a total of $2.4 trillion.
Article
The authors test whether acquisitions and divestitures are related to environmental uncertainty and diversification strategy. Drawing from transaction cost economics, they predicted that increases in environmental uncertainty would reduce a company's ability to manage its subsidiaries efficiently and would lead to divestiture. Conversely, they predicted that decreases in environmental uncertainty would enable a company to manage its subsidiaries more efficiently and would lead to acquisition. Those predictions were expected to be strongest for firms with intermediate levels of diversification, as such firms are believed to be the most difficult to manage efficiently. Repeated measures analyses of a panel of 164 Fortune 500 companies supported the predictions for highly diversified firms (e.g., unrelated businesses) only. Less diversified firms reacted to increases in uncertainty by acquiring and to decreases in uncertainty by divesting. The results suggest that the relationship between diversification strategy and portfolio restructuring depends on environmental uncertainty. In addition, the study findings imply that there may be limits in the hierarchy's governance efficiency in relation to market modes and that those limits may be affected by environmental uncertainty and diversification strategy.
Article
We explore whether pioneering advantages exist for early-mover acquirers in industry acquisition waves by examining both combined (target and acquirer) and acquirer stock returns. Combined abnormal returns are higher for acquisitions that occur at the beginning of acquisition waves. However, for acquirers' returns, only strategic pioneers—those acting in manners consistent with having superior information—capture significant advantages. Specifically, early-mover acquirers who realize superior stock returns are those that conduct acquisitions in related industries, during industry expansionary phases, and finance their acquisitions as financial theory suggests they should when they possess an informational advantage—with cash. Our findings extend the first-mover literature to corporate practices and link these practices to acquisition returns. Copyright © 2004 John Wiley & Sons, Ltd.