Yesterday a Delaware judge, Chancellor William B. Chandler III, stepped into a takeover battle between CVS Corp. (NYSE: CVS), CareMark Rx, Inc. (NYSE: CMX), and Express Scripts, Inc. (NYSE: ESRX) because CMX's board has fallen down on the job.
For the last several weeks, I've been a fairly lonely voice in the wilderness (: <) railing against how CMX directors were low-balling its shares to CVS in order to protect CMX's management team. At one point, ESRX's bid was $5 billion above CVS's. I made such comments here, here, here and here.
But in the last week, I've gotten some company -- specifically, Glass, Lewis & Co., CtW Investment Group and Institutional Shareholder Services said that CMX's board is not getting the best deal for its shareholders and urged, before the latest CVS offer, that Caremark shareholders reject the bid.
Yesterday there was a new development. Chandler intervened to delay the shareholder vote on the CVS/CMX deal from February 20 to at least March 9. A major shareholder, Louisiana Municipal Police Employees' Retirement System (LMPERS), sued for more time to consider the CVS offer. The judge granted LMPERS's request after reading an SEC filing in which CMX disclosed that it met with ESRX in 2001, 2003 and most recently in 2005 to review potential transactions -- meetings which Chandler concluded a reasonable shareholder would find "highly relevant." Chandler also set an injunction hearing for February 16, which could possibly halt or delay the CVS deal.
But hours before Chandler's ruling, CVS increased by $1.7 billion the proposed dividend it would pay CMX holders. At the moment, bids from ESRX and CVS, at $26 billion and $25.7 billion respectively, value CMX at roughly the same price. Meanwhile, CMX's $26.8 billion market capitalization suggests that the market expects a higher bid.
In acquisitions the job of a corporate board is to maximize shareholder value by aggressively negotiating with several qualified buyers. By refusing to engage with ESRX and possibly others -- including private equity buyers -- CMX's board has clearly fallen down on the job, thus inviting judicial intervention.
Why has CMX's board been pushing so hard for CVS? CVS's merger proposal protects Caremark's directors and executives from personal liability in current investigations into stock-option backdating. ESRX's does not.
What to do? Since the self-interest of CMX's board and management is at odds with that of its public shareholders, those individuals should be replaced with ones who can perform their fiduciary duties.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in CMX, CVS, or ESRX.