McKesson Backs Away From A Mega-Acquisition

In case you didn’t notice, McKesson (NYSE:MCK) appears to have taken the possibility of a mega-acquisition off the table with two recent announcements about its cash hoard:

• The company’s Board of Directors authorized an additional share repurchase of $1 billion in the company’s FY2010 earnings announcement.
• McKesson raised its dividend by 50% last week.

McKesson ended the first calendar quarter of 2010 with $3.7 billion in cash but only $2.3 billion in long-term debt. (See chart below.) This cash mountain suggests McKesson had plenty of room to take on more debt and swing a major acquisition. A big acquisition is still possible, but just less likely.

I wrote about the Phoenix Group option in Is McKesson in the hunt for an EU acquisition? The Merckle family, who owns Phoenix, made a bundle off the sale of Ratiopharm to Teva and therefore lost the compelling need to sell the European wholesaler.

A Wall Street Journal article written at the peak of the buyback boom of 2007 suggests three reasons for buybacks.

• Buybacks are a tax-efficient way to return cash to shareholders. Dividends are taxable but there is no tax due on a share buyback unless investors sell their shares.
• Buybacks signal that the company doesn’t know how to grow.
• Buybacks can benefit corporate executives, especially if their compensation is tied to Earnings Per Share and share-price targets. Buybacks also benefit executives with large holdings of stock options.

I prefer not to speculate on McKesson's motivations on the blog, so I leave it to the Wall Street boffins to sort out the relative merits of these explanations.