In recent times, CVS Health Corp., a leading American health service organization and pharmacy, has been receiving a great deal of pressure—primarily from its shareholders—to consider splitting the company. Under scrutiny are the different arms of this mega conglomerate, with various stakeholders suggesting that it becomes a more specialized company, instead of the diversified giant it currently is.
The primary pressure for a breakup comes from a belief amongst a section of investors who suspect that the individual components of CVS Health Corp. are worth more separately than when packaged together as one entity. The company currently operates majorly as a pharmacy, a Pharmacy Benefits Manager (PBM) in CVS Caremark, and a health insurer in Aetna.
In order to fully understand the gravity of the proposed breakup, it is advantageous to first understand CVS Health Corp’s various subsectors. CVS Caremark serves as a bridge between pharmacies, drug manufacturers, and health insurers, ensuring that consumers can afford the medications they need. Simultaneously, CVS Pharmacy operates as a national chain of drug stores that, in addition to filling prescriptions, also sell a variety of general merchandise, including over-the-counter drugs, beauty products, cosmetics, and more. Lastly, Aetna, which was acquired by CVS in 2018, serves as a health insurance provider.
The current diversified structure allows CVS to offer a wide range of services and products to its customers, presenting a one-stop tour for all their health concerns, from insurance to drug fulfillment. This all-in-one model has seemingly worked well for the company, becoming an essential part of its corporate identity. However, the pressure arises from the “pure-play” investment strategy that has recently gained traction in the financial world. The simple underlying concept is that if a company focuses its resources and capabilities on one or two key areas, it stands a better chance of achieving increased proficiency and efficiency thereby outperforming diversified competitors.
In line with this idea, some investors argue that CVS could increase its market value by spinning off its retail pharmacy and focusing on its health insurer and PBM. In essence, creating separate, specialized entities might boost efficiency, reduce management complexity and fetch better market valuation. Nevertheless, this proposed approach also comes with its fair share of risks.
Diverting from the diversified path CVS health Corp. has trodden heavily for many years has its downsides. The interlinking of business segments in a diversified business model grants it a cushion against economic or company-specific shocks, which a specialized company would not be privileged to have. Hence, if one segment underperforms in a given quarter, others may potentially help offset the financial impact. Moreover, it doesn’t guarantee that the separated businesses will do better financially, or present a more attractive investment for shareholders.
Additionally, the proposed separation might increase costs for CVS, especially given that the integration of operations among these segments has been cited as a reason for reduced costs and the creation and maintenance of a consumer-centric beneficial business model. Furthermore, these components being under one umbrella provide a unique selling proposition to CVS – a full-service healthcare approach – helping them stand out in the competitive arena.
In conclusion, while the calls for a potential split of CVS Health Corp. presents an interesting debate of diversified versus specialized business model, it should be made clear that neither structure guarantees that a company would flourish. The decision to split or not will have significant ramifications for the company, its employees, and its customers. It is, therefore, crucial for the leaders to weigh the advantages and disadvantages carefully before making any drastic decisions. It remains to be seen how CVS will navigate this tremendous pressure and what shape its future business structure will take.