Valeant Pharmaceuticals Intl Inc (VRX), XPO Logistics Inc (XPO): This Acquisition Spree Could Create Future Struggles

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) jumped 8% on Monday, giving the stock a two-day 22% surge. Those large gains stemmed from Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s acquisition of Bausch & Lomb for $8.7 billion, which is expected to expand Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s small ophthalmology business.

According to the Associated Press, adding Bausch & Lomb — Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s 15th purchase since 2010 — will add $3.3 billion to the company’s top line this year.

Most notably, on April 22 Valeant Pharmaceuticals Intl Inc (NYSE:VRX) acquired Obagi Medical Products for $24 a share, or $420 million, a deal that could lead to $120 million more in annual sales.

Creating Value Through Acquisitions

While Valeant Pharmaceuticals Intl Inc (NYSE:VRX) CEO Michael Pearson has always been very vocal regarding his acquisition growth strategy, the strategy itself appears less than stellar. To explain, let’s first take a look at a very different company with a similar growth strategy: XPO Logistics Inc (NYSE:XPO).

XPO Logistics Inc (NYSE:XPO), a truck brokerage company, had revenue of $177 million in 2011. But thanks to a string of purchases, it’s now on pace to post annual revenue of $600 million in 2013.

In 2012 alone, XPO Logistics Inc (NYSE:XPO) completed four acquisitions that added $253 million in annual revenue, at a collective cost of $62 million. XPO Logistics Inc (NYSE:XPO) then integrated the new revenue into its sales channel to produce additional growth.

Currently, XPO Logistics Inc (NYSE:XPO) is expanding rapidly with cold starts and is hiring more than 60 people per month. Therefore, its goal is growth, not profitability. After its growth period, costs will slow, and the company expects to maintain net profit margins between 5% and 10%.

XPO Logistics Inc (NYSE:XPO) CEO Bradley Jacobs has said that he only acquires companies that can be scaled up quickly to double in size. Therefore, if the $250 million of acquired revenue can become $500 million – with a net profit margin of 5% — then it’ll take just two and a half years for 2012’s acquisitions to return a profit for XPO Logistics.