Buying a New Look: Walgreens Gets Drugstore.com

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Includes: DSCM, WBA
by: 451 Research: Inorganic Growth

By Brenon Daly

In any business, it’s tough to take the old and make it new. In fact, that sometimes requires a little outside help. That came through in Walgreens' (WAG) purchase Thursday of Drugstore.com (NASDAQ:DSCM). After all, here is Walgreens - a 110-year-old chain that’s the largest drugstore in the U.S. - saying it can’t necessarily get its online business where it wants it to be on its own. So the company is set to hand over $429m in cash for Drugstore.com to bolster its online sales.

As an aside, the deal caps a run by Drugstore.com that in many ways embodies the whole Internet Bubble. It was a hot IPO back in 1999, just five months after opening its virtual doors. Sales were still in the single digits of millions of dollars when it went public. Of course, investors couldn’t get enough of the freshly minted equity - at least not until the bubble burst in 2000.

After that, shares never again traded in the double digits. Walgreens is set to pay $3.80 for each share of Drugstore.com, more than twice the market said the stock was worth the day before the deal was announced. The kicker on Drugstore.com is that the company was probably more highly valued when it was a tiny startup in a frothy era than today, when it is a business generating about a half-billion dollars in sales.

Actually, this is the second transaction in a month that has seen an Old Economy company pay up to join the New Economy. In mid-February, Nordstrom (NYSE:JWN) threw $180m at HauteLook to get into the private-sale marketplace. (Terms also include a potential $90m earnout for HauteLook.) To understand the motivation, consider the relative age of the two sides in the transaction: Nordstrom opened its first store in 1901, while HauteLook went live (in the digital parlance) only in 2007.