Show Me (More Than) the Money


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It's great to be popular. If you're a business owner ready to cash out, it's especially gratifying to have two potential suitors in the wings.

But picking the right one isn't always easy.

That's the dilemma facing California-based Longs Drugs. The drugstore chain is currently in the midst of a heated buyout battle between the two biggest industry behemoths: Walgreen (WAG) and CVS Caremark (STOCK QUOTE: CVS).

What makes Longs (LDG) so alluring? It all goes back to the power of location. Longs Drugs has a strong foothold in Northern California, an area where CVS has few stores. CVS is hoping to expand its pharmacy benefit management services, which coordinate prescription services for employee health-care plans. But they can only do so if employers know their workers will have access to pharmacies throughout the U.S.

Clearly, CVS is a motivated buyer. "In a nutshell, we would view Longs as a nice win for Walgreens, but a must-have for CVS Caremark at this point," wrote analyst Mark Miller of William Blair & Company in a research note.

So why is Walgreen jumping in? Although it has stores throughout California, Walgreens would like to dominate the north as well. The company would also love to expand in Hawaii, where Longs is the dominant pharmacy.

Longs originally pursued a deal with CVS, only to see Walgreen burst in with a higher offer. But promising more per share doesn't necessarily guarantee a win. Longs has turned down the Walgreens offer, citing a number of issues that made the company wary of a potential deal.

What did CVS do right? And what can you learn from this drugstore tussle should you decide to sell? The sentiment behind Longs' decision is clear: CVS made a better case. Here are the factors that swayed Longs:

1. Fewer legal hassles

Given that Longs and Walgreen both have a significant number of California stores, a merger between the two could trigger an antitrust investigation. "Given the regulatory risks associated with a Walgreens-Longs transaction," Longs management said in a statement, "it is unlikely that any transaction could be consummated without undue delay. Assuming regulatory approvals could be obtained, we estimate that the approval process could take 9 to 12 months."

CVS, in contrast, has few stores in Longs' prime territory, so a merger between the two would be less likely to draw regulatory action. In any case, CVS had already obtained regulatory approval before the Walgreen offer became public.

Look for buyers who have done their research before they come calling. Ideally, you want someone who has not only investigated potential legal issues, but has come up with a plan to handle them.

2. Showing seriousness

It's one thing to talk vaguely of getting married someday; it's another to show up with a ring, roses and champagne. A major sticking point for Longs management was that Walgreens' offer was non-binding. In fact, Walgreen demanded Longs terminate its existing merger agreement with CVS before it would consider offering its own agreement. The problem? Longs could be left hanging if it reneged on its deal with CVS but never reached an agreement with Walgreens.

Forget the sweet talk. You want a buyer who makes his intentions clear up front. Bonus points for putting it all in writing.

3. Where's the money?

Another crucial issue was financing. In its statement, Longs management said Walgreens' offer contained no details on how to pay for the deal. CVS, in contrast, spelled out the terms of its financing, which includes a combination of cash and loans.

It's not enough for a buyer to throw out a dazzling dollar amount. Rather than take a higher offer from a buyer who's leveraged to the hilt, it may pay to go with a lower offer from someone who can actually afford it.

Despite a firm rebuttal from Longs, Walgreen hasn't given up. The company may even consider a hostile takeover bid. Even if Walgreen doesn't win the prize, drawing out the fight for Longs could still damage its largest rival if CVS is forced to raise its offer.

"CVS Caremark needs quality retail assets in northern California," wrote Miller. "Per CVS management, to build a retail network from scratch could take the company a decade or so. However, the key question for CVS investors may turn out to be: 'Yes, we won Longs, but at what price?' "

No matter what price you're offered for your business, make sure it's worth it -- not just money-wise.

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