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Unformatted text preview: Copyright © 2009 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Mary B. Teagarden, with the assistance of Jayesh Gandhi ’02, for the purpose of classroom discussion only, and not to indicate either effec- tive or ineffective management. Mary B. Teagarden Cardinal Health Inc. (A) Introduction Bob Walter belted himself into his bright-red BMW two-seater and reflected on the pep talk that he was about to give to his top managers at the Embassy Suites, a five-minute drive away. Cardinal Health, the health care products-distribution industry merger and acquisition juggernaut, had hit an earnings speed bump. Cardinal was one of a handful of large U.S. companies that had achieved earnings-per-share growth in excess of 20 percent for 15 years straight. Nevertheless, Wall Street was questioning whether Cardinal Health, an empire that had grown through acquisition, could continue to grow at this remarkable rate using this approach. This doubt, coupled with recent questionable “stock crushing” accounting practices among wholesalers (including one of their own sup- pliers, Pfizer), was weighing down Cardinal’s stock price despite their continued and healthy earnings growth. Walter believed that recent blowups at major U.S. companies had occurred because of ultra-fast growth, high debt, and unfocused strategies, with Tyco serving as a prime example. Cardinal, by contrast, had grown gradually, had low debt (16 percent of total capital), and followed an acquisition program that never strayed from selling to pharmacies, hospitals, and pharmaceutical makers. Walter’s fans, such as Peter Lynch, a Fidelity vice chairman, commented, “He’s one of the best managers I’ve ever seen—and I’ve seen thousands” (Lashin- sky). In 32 years, Walter had weathered other storms, and believed that this current speed bump was little more than the latest in a long line of “ crises du jour ” that included the Clinton health care plan of the early 1990s that had been expected to drive down drug prices, and the Internet threat of the late 1990s that had been expected to eliminate distributors altogether. Each time, Cardinal’s stock rebounded. Walter believed the stock would rebound again as he repositioned Cardinal to compete beyond distribution into higher-margin services and pharmaceutical manufacturing. The Health Care Industry Health care is a vital, dynamic industry with exciting prospects for future growth in the U.S. In 2006, health care expenditures totaled $2.5.trillion, which was 16.3 percent of the U.S. gross domestic product, and grow- ing at a rate faster than the GDP. The U.S. population age 65 and over was expected to double in the next 25 years. By 2030, almost one out of five Americans (some 72 million people) would be 65 years or older. The age group 85 and older was the fastest growing segment of the U.S. population. They represented 27 percent of the U.S. population in 2002, and forecasts were that their numbers would increase 13 percent, totaling 85 million U....
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- Spring '11
- Cardinal Health, Cardinal Health Inc.