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Buy or Bury The Competition│ Competitive Strategy Today

By Saurav Bhandary   │Updated on June 12, 2018

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Amazon used to control a tiny fraction of the market share in America’s highly fragmented grocery business. Well, not anymore. Amazon is shaking up the entire supermarket industry by acquiring the upscale grocery chain Whole Foods for $13.7 billion in August 2017 (Weinberger, 2017). It does not stop there. They recently opened a grocery store in Seattle where customers can pick up their online orders. Amazon Go, their new convenience store, uses sensors and new technology that allows customers to walk in and walk out without having to go through a cashier (Bhattarai & Harwell, 2018). Amazon has also started selling some of their products at Whole Foods, and vice-versa. The move could potentially slice into profits for other food manufacturers such as Walmart, Publix, and Kroger, etc. It could also potentially create a challenge for companies that deliver groceries such as FreshDirect, Peapod, Blue Apron and Sun Basket. 

Note: Amazon Founder and CEO Jeff Bezos bought The Washington Post for $250 million in 2013 (Irwin & Mui, 2013).

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Chart courtesy of LA Times Graphics

Walmart, one of the largest retailer in the US, has been struggling to play catch-up in online sales. Immediately after Amazon acquired Whole Foods, Walmart announced to acquire online men’s fashion retailer Bonobos for $310 million as it seeks to bridge the gap with e-commerce leader Amazon (Merced, 2017). Last year they agreed to buy another online retailer, Jet.com for $3.3 billion (Picker & Abrams, 2016). On December 6, 2017, Walmart announced that they are changing its official name from ‘Wal-Mart Stores’ to ‘Walmart’, effective February 1, 2018 (Peterson, 2017). Walmart has been working aggressively to transform itself into a dominant force and even changing its name to reflect its increasing emphasis on e-commerce.

Similarly, CVS has recently announced that they are planning on buying the US health insurer Aetna Insurance company for $69 billion (Horowitz & Wiener-Bronner, 2017). It could also go down as the largest health insurance deal in history. It is exceeding the last record-holder, when Express Scripts, the pharmacy benefits manager, acquired Medico Health Solutions for $29.1 billion in 2012 (Sorkin & Nicholson, 2011). The deal was projected to bring at least $100 billion in annual revenue. They have not yet closed up the deal, but when and if they do, it would drastically remap the healthcare industry.

CVS Health CEO Larry Merlo said that, “[I]t’s really the perfect time to bring these two companies together, to create a new healthcare platform that can be easier to use and less expensive for consumers, and really create a new front door to healthcare in our country” (Bach, 2017). 

But the question worth asking is how does this deal affect you? We do not know the definitive answer just yet, but it could bring the cost down. For instance, when you have the flu or sprained ankle, you could avoid costly emergency room visits and save money by visiting CVS’s nearby drugstore instead. You would get high-quality service, affordable and low-cost medical care. CVS will bring more annual revenue after the acquisition, but the savings would also get passed down to consumers. Win-Win tactic is what I see if CVS does really acquire Aetna.

Also, if you have not noticed yet CVS has already banned tobacco products from its more than 7,600 stores nationwide. In 2014, CVS decided to stop selling all tobacco products and instead add healthier options (CVS Health, 2014). That was their larger effort to be a bigger player in the healthcare industry. Who knew it then. It was part of their bigger plan all along.

Similarly, Google quietly acquired Android, the wireless software startup company, in 2005 for an undisclosed price which has been estimated at $50 million (Thomas, 2010). Since then, Android’s operating system has become the most popular smartphone operating system in the world. In 2006, Google bought video-sharing site YouTube for $1.65 billion (Sweney & Johnson, 2006). Google announced it acquired Waze, Israeli traffic and navigation service, for more than $1.1 billion in 2013 (Bort, 2015)

So why do companies merge with or acquire other companies? One could argue that the main reason is to kill the future competition or to gain a larger market share. For instance, In 2010 Google acquired online photo editing app Piknik for an undisclosed sum of money only to kill it a year later (Schofield, 2010). Over years, Google has bought many other small competitors and then let them die, which is why Google is undoubted king of the internet.

The world of media is changing at a rapid pace with proposed mergers, and the Federal Communication Commission’s rollback of regulations has only accelerated the changes. More and more local TV stations could be soon owned by just a few handful corporations. The giant internet service providers that also control their own media could now slow down other streaming services to push you towards their content. What you watch and how you get your news could be partly determined by which company that provides your internet service.

this-chart-provides-an-overview-of-the-brands-and-assets-that-the-proposed-85-billion-merger-between-att-and-time-warner-would-bring-together

This chart provides an overview of the brands and assets that the proposed $85 billion merger between AT&T and Time Warner would bring together. (Chart courtesy of Statista)

In 2016, AT&T Inc. announced it has reached an $85 billion deal to acquire Time Warner Inc.– a merger that is now being sued by the Department of Justice (Zarroli, Martin, & Chappell, 2016). An acquisition has been pending for more than a year and if the deal goes through, the telecom giant will gain control of a media empire including CNN, HBO, Warner Brothers Entertainment, TBS, and TNT, etc. AT&T’s deal with Time Warner follows another major acquisition in 2014 when it acquired DirecTV for about $48.5 billion (Yu, 2014).

(Update as of Tuesday, June 12, 2018: A federal judge has approved AT&T’s $85 billion deal to acquire Time Warner on Tuesday after the Justice Department attempted to block the takeover over antitrust concerns, reported The New York Times. “Ultimately, I conclude that the Government has failed to meet its burden to establish that the proposed transaction is likely to lessen competition substantially,” Judge Leon wrote in his opinion.)

In 2011, Comcast acquired General Electric’s 51% stake in NBCUniversal in a deal valued at $30 billion- transforming the nation’s biggest cable and Internet service provider into a diversified media company (Kang, 2011). Comcast acquired the rest of GE’s 49% stake in NBCUniversal in 2013, taking full ownership of the film and television giant in a $16.7 billion deal (O’Toole, 2013). On Apr 28, 2016, NBCUniversal, a division of Comcast Corporation, announced the acquisition of DreamWorks Animation for $3.8 billion (Comcast Corporation, 2016)

Other similar mergers include Verizon’s purchase of AOL  for approximately $4.4 billion in 2015 (Hjelmgaard & Molina, 2015) and Yahoo for $4.48 billion in 2017 (Goel, 2017).  Verizon then combined AOL and Yahoo! to create a new company called Oath. Verizon’s subsidiary Oath Inc. owns more than 50 media and technology brands including HuffPost, AOL.com, Yahoo Mail, Yahoo News, Yahoo Sports, Yahoo Finance, Tumblr, TechCrunch, Engadget, and more (Oath Inc., 2017). The telecom giant has been slowly sprawling into digital media.

Verizon, for instance, is one of the three largest internet service providers in the U.S that also own its own media empire. It can be argued that the internet service providers like Verizon, Comcast, and AT&T could start slowing down a service like Netflix to make its own streaming service more competitive. And now, without Net Neutrality rules in place, they are free to do so.

Amazon/Whole Foods and CVS/Aetna, however, are the different cases. The reason for Amazon to acquire Whole Foods could be to achieve diversification — a broader product offering, for example. It also helps to increase a firm’s supply chain pricing power. Amazon could potentially use Whole Foods as their pick-up and distribution centers, therefore lowering their shipping cost, which is why they can offer their products at a discounted price.

CVS CEO Larry Merlo said that Aetna will keep operating as a separate unit and the same existing leadership team is expected to run the Aetna business (O’Donnell & Humer, 2017). CVS plans to convert its stores to low-cost clinics to provide services to Aetna’s more than 20 million medical members. CVS acquiring Aetna is a profitable way of entering a new market- meaning more consumers now have access to a wider range of products to choose from. More varieties attract more consumers, which would mean a larger profit margin. That would also mean they could cut their costs substantially since their low-cost clinic will serve as an alternative to expensive emergency room visits.


References:

Bach, N. (2017, December 4). Here’s How the CVS-Aetna Deal Is Supposed to Affect Consumers. Retrieved from http://fortune.com/2017/12/04/cvs-aetna-deal-consumers/

Bhattarai, A., & Harwell, D. (2018, January 23). Inside Amazon Go: The camera-filled convenience store that watches you back. Retrieved from http://www.chicagotribune.com/business/ct-biz-amazon-go-cashierless-store-20180123-story.html

Bort, J. (2015, August 13). Waze cofounder tells us how his company’s $1 billion sale to Google really went down. Retrieved from http://www.businessinsider.com/how-google-bought-waze-the-inside-story-2015-8

Comcast Corporation. (2016, April 28). NBCUniversal Announces DreamWorks Animation Acquisition. Retrieved from https://corporate.comcast.com/news-information/news-feed/nbcuniversal-announces-dreamworks-animation-acquisition

CVS Health. (2014, May 02). CVS Stops Selling Tobacco – Message from Larry Merlo, President and CEO. Retrieved from https://cvshealth.com/thought-leadership/message-from-larry-merlo-president-and-ceo

Folkenflik, D., & Noguchi, Y. (2018, June 12). U.S. Judge Approves AT&T’s $85 Billion Merger With Time Warner. Retrieved from https://www.npr.org/2018/06/12/614092532/u-s-judge-approves-at-ts-85-billion-merger-with-time-warner

Goel, V. (2017, February 21). Verizon Will Pay $350 Million Less for Yahoo. Retrieved from https://www.nytimes.com/2017/02/21/technology/verizon-will-pay-350-million-less-for-yahoo.html?mtrref=www.google.com&gwh=D86DE6C2936CD1BBB8515E22EDC4EEB3&gwt=pay

Hjelmgaard, K., & Molina, B. (2015, May 12). Verizon to acquire AOL in $4.4 billion deal. Retrieved from https://www.usatoday.com/story/money/business/2015/05/12/verizon-aol/27162459/#

Horowitz, J., & Wiener-Bronner, D. (2017, December 3). CVS is buying Aetna in massive deal that could transform health care. Retrieved from http://money.cnn.com/2017/12/03/investing/cvs-health-aetna-merger/index.html

Irwin, N., & Mui, Y. Q. (2013, August 05). Washington Post sale: Details of Bezos deal. Retrieved from https://www.washingtonpost.com/business/economy/details-of-bezos-deal-to-buy-washington-post/2013/08/05/968a2bc4-fe1b-11e2-9711-3708310f6f4d_story.html?utm_term=.d751fcad8d78

Kang, C. (2011, January 18). Federal regulators approve Comcast’s acquisition of NBC Universal, with asterisks. Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2011/01/18/AR2011011806440.html

Kang, C., Lee, E., & Cochrane, E. (2018, June 12). AT&T’s Time Warner Takeover Wins Judge’s Approval in Defeat for Justice Dept. Retrieved from https://www.nytimes.com/2018/06/12/business/dealbook/att-time-warner-ruling-antitrust-case.html

Merced, M. J. (2017, June 16). Walmart to Buy Bonobos, Men’s Wear Company, for $310 Million. Retrieved from https://www.nytimes.com/2017/06/16/business/walmart-bonobos-merger.html

Molla, R., & Kafka, P. (2018, January 23). Here’s who owns everything in the media today. Retrieved from https://www.recode.net/2018/1/23/16905844/media-landscape-verizon-amazon-comcast-disney-fox-relationships-chart

O’Donnell, C., & Humer, C. (2017, December 03). CVS Health to acquire Aetna for $69 billion in year’s largest… Retrieved from https://www.reuters.com/article/us-aetna-m-a-cvs-health/cvs-health-to-acquire-aetna-for-69-billion-in-years-largest-acquisition-idUSKBN1DX0NC

O’Toole, J. (2013, February 12). Comcast to buy out GE’s stake in NBCUniversal. Retrieved from http://money.cnn.com/2013/02/12/news/companies/ge-comcast-nbc-universal/index.html

Oath Inc. (2017, June 13). Verizon and Yahoo creating Oath subsidiary. Retrieved from https://www.oath.com/2017/06/13/verizon-completes-yahoo-acquisition-creating-a-diverse-house-of/

Peterson, H. (2017, December 06). Walmart is changing its name – and it reveals a key strategy for the company’s future. Retrieved from http://www.businessinsider.com/walmart-changes-its-name-2017-12

Picker, L., & Abrams, R. (2016, August 08). Walmart Rewrites Its E-Commerce Strategy With $3.3 Billion Deal for Jet.com. Retrieved from https://www.nytimes.com/2016/08/09/business/dealbook/walmart-jet-com.html

Schofield, J. (2010, March 01). Google buys Picnik for online photo editing. Retrieved from https://www.theguardian.com/technology/blog/2010/mar/01/google-buys-picnik-photo-editing-site

Selyukh, A. (2017, November 20). Justice Department Sues To Block AT&T’s Merger With Time Warner. Retrieved from https://www.npr.org/sections/thetwo-way/2017/11/20/565476244/justice-department-sues-to-block-at-ts-merger-with-time-warner

Sorkin, A. R., & Nicholson, C. V. (2011, July 21). Express Scripts to Buy Medco for $29 Billion. Retrieved from https://dealbook.nytimes.com/2011/07/21/express-scripts-to-buy-medco-for-29-billion/

Sweney, M., & Johnson, B. (2006, October 09). Google buys YouTube for $1.65bn. Retrieved from https://www.theguardian.com/media/2006/oct/09/digitalmedia.googlethemedia

Thomas, O. (2010, October 27). Google exec: Android was “best deal ever”. Retrieved from https://venturebeat.com/2010/10/27/google-exec-android-was-best-deal-ever/

U.S. District Court for the District of Columbia. (2018, June 12). Retrieved from http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf

Weinberger, M. (2017, December 17). The $13.7 billion Whole Foods buy has turned the world against Amazon – and we’ll see the sparks fly next year. Retrieved from http://www.businessinsider.com/amazon-and-whole-foods-versus-everybody-2017-11

Yu, R. (2014, May 18). AT&T buys DirecTV for $48.5 billion. Retrieved from https://www.usatoday.com/story/news/usanow/2014/05/18/att-buys-directv/9247795/

Zarroli, J., Martin, M., & Chappell, B. (2016, October 22). AT&T To Buy Time Warner For $85 Billion. Retrieved from https://www.npr.org/2016/10/22/498987413/at-t-to-buy-time-warner-for-85-billion