McKESSON CORPORATION

1833–1926

Market Value: $1.549 billion

Stock Index: New York

McKesson Corporation's journey to the highest ranking position in the wholesale distribution industry occurred over a period of many years. However, the changes in direction as well as management philosophies experienced by McKesson during its 150 years of business have resulted in a company that is resilient and secure in its future direction.

In 1833 John McKesson founded his own wholesale drug company in Manhattan with another partner, and the company was known as Olcott & McKesson. Twenty years and another partner later, the firm changed its name to McKesson & Robbins. Yet this was just the beginning of the changes experienced by McKesson. When John McKesson died in 1893, the McKesson heirs left the company in order to form the New York Quinine and Chemical Works. Subsequently, in 1926, McKesson & Robbins was sold to Frank D. Coster.

Coster was responsible for turning the respected name of McKesson & Robbins into one connected with scandal. Coster's real name was Philip Musica, the son of a New York importer of Italian foods. The Musica family prospered in their import trade primarily by bribing the dock customs weigher to falsify the weight of the shipment. However, the prosperity did not last long and in 1909 the Musica team was arrested. Philip paid a $5,000 fine and served five months in prison for the crime.

The prison experience did not reform the Musicas, however, and when they were again arrested in 1913 the charges were similar. Their hair importing business, started after Philip left prison, was in debt for $500,000 in bank loans. Through a bank investigation it was discovered that the supposedly valuable hair pieces being used for collateral were in fact only worthiness ends and short pieces of hair. The Musica family was caught trying to escape on a departing New Orleans ship. Philip was the scapegoat for the family escapades once again and served three years in prison. When he was released in 1916 he worked for the District Attorney's office as an undercover agent named William Johnson.

During World War I Musica began a poultry business, but his entanglement with the law was not over. In 1920, although he was indicted on charges stemming from a murder case, he was never convicted and did not serve a prison sentence. Shortly afterward, Musica changed his business interests from poultry to pharmaceuticals, posing as president of Adelphi Pharmaceutical Manufacturing Company in Brooklyn. This company was actually a front for a bootlegging concern and Musica's partner, Joseph Brandino, would later contribute to Musica's suicide through his blackmail attempts.

Morison's objective was to streamline the company by selling its low profit operations and investing $200 million into new businesses by 1990.

1912–1976

Musica changed his name to Frank D. Coster after the close of Adelphi. With his secret past behind him, Coster managed to establish himself as a respectable businessman by starting a hair tonic company that had a supposedly large customer list. With this outwardly attractive collateral, Coster appeared to be a reasonable buyer for McKesson & Robbins in 1926. For 13 years after he purchased McKesson & Robbins, Coster was able to keep his identity a secret; he was even listed in Who's Who in America where he was described as a businessman as well as a "practicing physician" from 1912 to 1914.

Coster's true identity was revealed in 1938 when a company treasurer's concern over the way the profits were being handled led to an investigation of McKesson & Robbins. The investigation uncovered that Coster had stolen $3 million from the company through the false customers he had set up and was also paying blackmail fees to his former partner, Brandino, who had discovered Coster's true identity and threatened to expose him. In 1939 Coster shot himself, Brandino was convicted of blackmail, and McKesson & Robbins once again returned to the normal conduct of business.

The company's calm and relatively quiet existence was intruded upon in 1967 when Foremost Dairy of California implemented a hostile takeover. The management of McKesson & Robbins was not pleased with this takeover and this resulted in an unhappy relationship between the two companies for several years after the merger. In fact, it was three years before McKesson offices were even moved to San Francisco, the headquarters of Foremost.

The new company formed by this merger, Foremost-McKesson, Inc. had no company strategy and was moving in several different directions at the same time. Rudolph Drews, head of Foremost-McKesson, is described by Forbes magazine as the "freewheeling" president who acquired several diverse companies from "sporting goods to candy" after the merger with McKesson, and who was better at making acquisitions than at managing the company. In 1974 Drews was forced from the corporation after a day long board meeting; his management style was considered the cause for a "flattening" of earnings.

Drews' response, "I'll be back," after he was fired from Foremost-McKesson was no idle threat. Drews established his own corporate-merger consulting business and found an opportunity in 1976 to orchestrate a takeover bid of his former company. Drews' middleman for this takeover bid was Victor Posner, a Miami multimillionaire who saw an opportunity to buy out Foremost-McKesson. William Morison, the new president of Foremost-McKesson, worked hard to resist this bid by Sharon Steel, Posner's Pennsylvania firm. Posner was able to obtain 10% of Foremost-McKesson's stock before Morison began the company's defensive strategy of careful planning, research and public relations moves that produced some valuable information on the Sharon Steel Corporation bid--the company had overstated its earnings for 1975 by 45%.

Posner's bid was unacceptable to Foremost-McKesson not only because of the connection with Drews, but also because of Posner's takeover tactics. Forbes states that Posner was "scourged coast to coast" for his tactics as a "corporate marauder." In response to Posner's success at buying 10% of Foremost-McKesson's stock and to guard against any similar activity in the future, Foremost-McKesson stockholders approved a charter change which prohibited any "unsuitable" part from acquiring over 10% of the company's common stock. An unsuitable party was defined as any business that might jeopardize Foremost's liquor or drug licenses.

The attempted takeover by Posner was a problem for Foremost-McKesson for many reasons. While the bid was dropped in April of 1976, the company had lost valuable time in executing the "turnaround plans" devised by the new president William Morison. Morison took over after Drews' departure in 1974 and was determined to make the company a more dynamic, streamlined operation. Up to this point, Foremost-McKesson had been viewed as two companies wedded together with no real direction and no real activity. Morison complained that, people o.dn he East Coast think of us as McKesson the drug company, and people on the West coast think of us as Foremost the dairy company, and we don't think either one really fits anymore.

1976–1990

With Morison's turnaround plans, Foremost-McKesson was creating a new image for itself. In 1977, Executive Vice President Thomas E. Drohan, compared the company to an elephant that, under the new direction of Morison, was now "off its knees and ambling noisily."

During its $14 million fight with Sharon Steel Corporation in 1976, Foremost-McKesson made two major acquisitions and sold or combined 11 of its less significant operations. Morison wanted to move the company away from its role of middleman as a wholesale distributor of pharmaceutical products, beverages and liquor, and emphasize production of proprietary products such as C.F. Mueller's pasta products. Morison's objective was to streamline the company by selling its low profit operations and investing $200 million into new businesses by 1990. The battle with Posner sidelined many of these goals, nevertheless Foremost's acquisitions of C.F. Mueller Company the country's largest pasta marker, and Gentry International, a processor of onion and garlic, were two significant acquisitions made in 1976 that met the objectives set by Morison.

Before Morison retired in 1978, he reorganized the company into four major operating groups: drugs and health care, wine and spirits, foods, and chemicals, as well as a small homebuilding division. Morison's strategic plan was the first of its kind for Foremost-McKesson, and it was one factor that placed the company in a more comfortable position for the future.

This strategy continued after Morison's retirement when Thomas P. Drohan took over as president. Drohan's defense against a corporate raider was to maintain a high stock price. And Drohan's style of management was to improve productivity along with saving money. Specifically, he updated the inventory and stock procedures so that computers were used to order stock, allowing Foremost to reduce personnel costs by a third.

Drohan also redefined the role of the middleman by establishing data processing procedures that would be valuable to both suppliers and customers, placing Foremost-McKesson in the position of acting as part of the marketing teams. These practices in the early 1980's put Foremost-McKesson in the position of a leader in wholesale practices. The company's investment in the wholesale business, automating warehousing, and data processing led to an average profit growth of 20% per year compared with the 2% average growth before 1976.

The 1980's saw a different type of company than the one described as "lethargic" only a decade earlier. The acquisitions made in the early part of the 1980's were made to strengthen the company's role as a major distributor of health care products. In 1983, the same year that the company name was changed to McKesson Corporation, $90 million was spent on acquisitions of distributor and distributor-related industries. In 1982 the drug distribution business contributed $2.1 billion to the company's $4 billion in sales. Net sales for the first part of the 1980's increased steadily, with only a slight drop in 1983.

The company diversified within the chemical industry as well. The McKesson chemical group has played an important role in the company's sales. The company purchased its first chemical recycling plant in 1981, with plans to build six additional plants around the country. The chemical solvent recycling was a profitable business because of the strict Resource Conservation and Recovery Act (RCRA) legislated in Congress that mandated environmentally safe disposal processes. McKesson expected to obtain 10% of the 1986 chemical solvent market.

1976–1984

Neil Harlan has been the chairman of McKesson Corporation since 1979. He is a former army captain, Harvard business professor, and McKinsey & Company director. Harlan's approach to management of the company has resulted in selling the pieces of the company that did not fit its distribution image. Specifically, C.F. Mueller was sold in 1983. Harlan stated that his company "erred" when Mueller was purchased in 1976 because Foremost-McKesson had no "east-coast presence in foods" and "few opportunities for combining sales forces, regional offices, or marketing efforts."

McKesson also sold Foremost Diaries in 1983, along with its food processing and homebuilding subsidiaries, all of which were 30% of the "old company's" assets. These subsidiaries no longer fit the "distribution vision" presented by Chairman Harlan.

Acquisition has been a key component of McKesson's management strategy since 1984. Acquisitions have included additional drug and health care product distributors, software firms, and drug and medical equipment distributors. The chemical group is still the least profitable group within the company because the centralized purchasing system applied to the drug and liquor wholesale distribution does not work as well in the chemical industry. Harlan states that he "hopes that our history shows we will not be afraid to make the hard decision [to get out of chemicals] if it's warranted."

Harlan's approach has made McKesson one of the leaders in wholesale distribution. His strategy is two-fold; he believes that "any company that doesn't stick to what it does best is inviting trouble" and that "anybody who doesn't prepare [for a raider] is living in a dreamworld." With this approach to managing a large corporation such as McKesson, the company has clearly established specific objectives for the future.