Walgreen Soap Opera Giving Leadership Headaches

By Business Leaders

If I wrote a column detailing all the times my forecasts were at odds with what my CEO expected, wanted or hoped for, it would be closer to a book than an article. That sort of tension is entirely common in the corporate world where pressure to beat on quarterly earnings can be enormous, to say the least.

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But the leadership soap opera unfolding at Walgreen Company (WAG), one of the nation’s largest drugstore chains, looks to be far more dysfunctional than what you might expect to see at your average everyday publicly traded company.

A defamation suit filed yesterday by the company’s former CFO, Wade Miquelon, and Walgreen’s response point to an epic “he-said, she-said” battle over a botched earnings forecast and a clash over a controversial tax-inversion plan to move the company’s headquarters overseas.  

Miquelon claims he was unjustly blamed for having to walk back a fiscal 2016 profit forecast by more than $1 billion due to rising costs of generic drugs under Medicare Part D. The suit alleges he was pressured by CEO Greg Wasson to project unrealistic earnings-per-share, as shown in this text exchange reported by the Wall Street Journal:

“Let’s push for a 6.00 somehow,” Wasson said.

“I don’t think there is any way we could ensure that. Getting a 5 is a miracle,” Miquelon replied.

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“No choice. Need a 6. We’ll find a way,” Wasson said.

The company disputes Miquelon’s version of events, telling investors that the finance group wasn’t communicating with those in charge of the pharmacy business and saying in a court motion that Miquelon is the one who’s been “overly optimistic” about the company’s financial forecasts.  

But it is telling that the motion filed by the chain seeks an emergency order to block the release of confidential information contained in the original complaint. In my experience, that usually indicates there’s a lot more going on than meets the eye.

In fact, the company had long been under pressure by activist investors to acquire the remaining 55% of European drugstore retailer Alliance Boots and move Walgreen’s corporate headquarters overseas in a ploy to lower its tax burden and boost profits.

Apparently Miquelon argued strongly against that strategy, which, according to the suit, put him at odds with his boss, Wasson, board director Stefano Pessina -- who owns about 8% of Walgreen and just happens to be CEO of Alliance Boots -- and hedge fund managers that had long been agitating for the move. It certainly appears that Walgreen’s leadership was hell-bent on boosting the stock (unlocking shareholder value, in activist speak) and Miquelon stood in the way.

So in early August, Miquelon was gone, along with pharmacy head Kermit Crawford, who was said to have retired. And while the company did complete its planned acquisition of Alliance Boots it decided not to attempt to move its headquarters overseas, causing the stock to crater nearly 20% over a two-day period.

Why the change in strategy? I’m sure the company was concerned that trying to avoid paying corporate taxes in the U.S. might result in a customer backlash. Not to mention that the move was risky given the current political climate over the controversial tactic, a concern I’m sure Miquelon would have expressed.    

A month after the former CFO’s departure -- whether it was voluntarily or not is still a point of contention as is so often the case in these situations -- Wasson added activist investor Barry Rosenstein of Jana Partners, which now owns 1.4% of Walgreen stock, to the board.

The opportunity is obvious. Walgreen’s revenues and profits have more or less flatlined over the past few years. Meanwhile rival drugstore chain CVS has continued to grow and its stock has outperformed both Walgreen and the S&P 500. That’s like a giant neon “buy” sign for an activist investor like Rosenstein.

Things certainly have changed on Wall Street. Now, I’m not going to say with a straight face that every single strategic decision we made back in the day was in the best interest of customers, employees and shareholders alike. That needle was certainly hard to thread at times.

Moreover, there have always been plenty of dysfunctional and incompetent executives to go around. They are, after all, made of flesh and blood.

But at least we didn’t have activist investors to contend with. Whether that’s a good or a bad thing depends on your perspective. While it may look like Wasson has been dancing with the devil, that may very well be because he simply can’t figure out how to get Walgreen to grow organically. It happens. And I suspect that’s what’s happening here.