Serialously – Another Acquisition for Valeant

This serial acquirer is sticking with its strategy. The company’s sizeable debt burden makes this a risky proposition.

| More on:
The Motley Fool

Valeant Pharmaceuticals (TSX:VRX,NYSE:VRX) is back in the acquisition ring after announcing the $343.8 million purchase of Obagi Medical Products (NASDAQ:OMPI) yesterday.  Obagi is the 21st company Valeant has purchased since the beginning of 2011.  The $344 million brings total cash spent on acquisitions to $6.3 billion over this period.  Pretty amazing for a company that had a market cap of about $7 billion when the shopping spree began.

All clear

Obagi is a maker of skin care products that booked revenues of $120 million last year.  Valeant is not only acquiring these revenue generating products, but the company also believes that it can realize $40 million of cost saving synergies.  In addition, Obagi’s distribution channel is an attractive asset that Valeant can leverage with its growing portfolio of dermatology related products.

On the surface, this deal looks pretty clean if you’re a Valeant shareholder.  Neither the $120 million in revenue nor the $344 million purchase price are overly material to a company that had revenue of $3.5 billion in 2012 and more than $900 million in cash on hand at last report.  And, if Valeant can pad its bottom line by successfully integrating Obagi’s business and realizing the proposed synergies, downside appears minimal.

For now

Regardless of its materiality, the Obagi deal makes it very clear that Valeant is going to keep on buying things.  Valeant is a serial acquirer and has demonstrated phenomenal growth by implementing this strategy.  It has taken a couple of big swings, like the 2011 $2.6 billion acquisition of Medicis, but for the most part, the company has knocked out singles and doubles with its purchases – like Obagi.

However, these singles and doubles with the odd home run have placed a huge burden on Valeant’s balance sheet.  The company is loaded with financial risk.

But beware the big one

Beyond financial risk, another huge risk is lurking for Valeant shareholders.  Singles and doubles are fine for a while, but can only hold the serial acquirer’s interest for so long.  You can bet, somewhere out there lies a “company transforming” acquisition for Valeant.

Ask Hewlett-Packard shareholders how much fun these types of transactions are.  HP purchased Autonomy several years ago for $11 billion and promptly had to write-off $8.8 billion when Autonomy fell short of expectations.  HP shareholders were lucky that the company’s balance sheet was in sound enough shape to absorb such a massive hit.  Valeant simply does not have this luxury.  Overpaying for a transformational purchase could mean the end.

The Foolish Bottom Line

Just like a leveraged investor, highly levered companies can blow up when faced with even the slightest bit of adversity.  The combination of a highly leveraged balance sheet and possibility of overpaying for a massive acquisition at some point makes this Fool highly wary of Valeant’s long-term viability.

We have created a special free report that provides an overview of five Canadian companies with negligible financial risk and exceptionally bright futures.  To receive this report, simply click here and we will deliver it to you, absolutely free!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

House Key And Keychain On Wooden Table
Investing

Canadian House Prices Fall for 2 Months Straight!

The housing market is tanking. Are REITs like RioCan Real Estate Investment Trust (TSX:REI.UN) worthy alternatives to housing investments?

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Got $5,000? Double it With This Passive-Income Stock

This passive-income stock has strong growth ahead as well as a solid dividend. This could lead to you doubling a…

Read more »

Technology
Stocks for Beginners

New to the TFSA? 4 TSX Stocks to Buy With $6,000

The tech stock selloff has created a March 2020-like opportunity to buy the dip. Here are four stocks to buy…

Read more »

Young woman sat at laptop by a window
Stocks for Beginners

New Investors: Start Investing in 2 Dividend Stocks With Peace of Mind

New investors who don't want to spend too much time managing their investments can consider buying these dividend stocks.

Read more »

Dividend Stocks

Here’s the Next Dividend Stock I’m Going to Buy

As the fear of recession increases, panic increases. At times like these, a dividend stock can mitigate your portfolio's downside.

Read more »

Couple relaxing on a beach in front of a sunset
Stocks for Beginners

How to Create a Complete “Lazy” Stock Portfolio With Just 4 BlackRock ETFs

Want a cheap, effective, and hands-off approach to investing? Give this article a read.

Read more »

Dollar symbol and Canadian flag on keyboard
Investing

2 Canadian Growth Stocks You’ll Regret Not Buying on the Dip

If you're looking for top growth stocks to take advantage of the market selloff and buy on the dip, here…

Read more »

You Should Know This
Stocks for Beginners

The Advantages and Disadvantages of Buying High-Yield Dividend Stocks

If you're considering buying high-yield stocks for your portfolio, especially in this environment, here's what to consider first.

Read more »