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McKESSON TO SEEK FURTHER AFIELD FOR ACQUISITION GROWTH AFTER TERMINATING PLANS TO BUY ALCO, NORTHWESTERN DRUG; FTC OPPOSED DEALS; ALCO TO "EXPLORE" OPTIONS

Executive Summary

McKesson is reasserting its pursuit of acquisition growth despite the scuttled acquisitions of Alco Health Services and Northwestern Drug Company. The wholesaler terminated both a tentative agreement to merge with Alco and a plan to buy Northwestern after the Federal Trade Commission announced that it would seek to block both. In an Oct. 3 statement, FTC said each of the proposed mergers "could substantially reduce competition in wholesale prescription drug distribution and the related services provided by wholesalers." The Alco deal would have combined two major distributors in the mid-Atlantic region and was an obvious target for anticompetitive review. The FTC decision in the Northwestern deal, however, may presage more difficulties for McKesson's acquisition policy in the future. It may indicate a very strict determination of regional market dominance. Two commissioners voted against the mergers and one, Chairman Daniel Oliver, cast the dissenting vote. Commissioner Mary Azcuenaga did not participate in the vote. FTC observed that McKesson and Alco are "two of the largest drug wholesalers in the U.S." and that Northwestern "has a large majority of its sales in Oregon and Washington state." McKesson has three houses in Washington state and one in Oregon. In reviewing proposed mergers for potential anticompetitive results, FTC economists typically interview both competitors and customers. A number of McKesson customers reportedly urged the commission to stop the proposed purchases. NARD openly challenged the deal, submitting substantive comments opposing the acquisition of Alco. NARD maintained that the merged companies could control 75%-90% of regional markets in Ohio and the Philadelphia/Baltimore corridor ("The Pink Sheet" Sept. 26, p. 5). Commission staff also consulted experts from related fields, including the National Association of Chain Drug Stores officials. A spokesman for McKesson said the decisions would not deter future attempts to expand. Potential acquisition opportunities will be explored on a case-by-case basis, the company explained. The trend toward consolidation in the wholesale drug industry will continue, McKesson predicted. Alco, which was headed towards a management buyout before McKesson stepped in, said "it is continuing to explore its alternatives in light of the FTC's action." Alco announced on Oct. 5 "that a special committee of its board of directors was continuing to work with its investment bankers, Drexel Burnham Lambert Inc., to explore alternative plans for maximizing shareholder value, including a sale or merger." The buyout group that was superceded by McKesson reportedly included Alco Chairman John Kennedy. When McKesson steped in, Kennedy left the company in August. That change ostensibly makes the buyout route look more problematic.
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