XPO Pulls Off 500 Purchases While Bypassing Wall StreetJeffrey McCracken and Leslie Picker
Brad Jacobs has negotiated 500 deals. Make that 501 and 502.
Jacobs, 57, isn’t a Wall Street banker but he’s acting like one as he tries to turn XPO Logistics Inc. into the largest company in the transport-services industry through serial takeovers. Yesterday, he closed on two more deals, worth a combined $652 million, bringing to 13 the number of acquisitions since he became chief executive officer in September 2011. Before XPO, he used the same roll-up strategy, buying hundreds of companies, to build United Rentals Inc. and United Waste Systems Inc. into market leaders.
Missing from these deals are investment bankers. Jacobs uses staff to scout out and negotiate acquisitions, turning to Wall Street banks for financing only. Jacobs takes aim at industries that are fragmented, growing and where bigger is better. Investors have rewarded the strategy, as XPO’s stock more than doubled in three years. Revenue is projected by analysts to be $2 billion this year from $177 million in 2011.
“Figure out what the seller wants and give it to them,” he said in an interview, describing his negotiating style. “That’s not always the highest price, by the way. I want to establish us as the buyer of choice.”
XPO, based in Greenwich, Connecticut, said yesterday it agreed to purchase New Breed Holding Co., a closely held provider of supply-chain technology to large companies and government agencies. The $615 million transaction, which was financed through loans from Wall Street, should close in the third quarter, the company said. XPO also acquired Atlantic Central Logistics for $36.5 million in cash. ACL focuses on e-commerce delivery services.
Jacobs first targeted the trash business for consolidation. He founded United Waste 25 years ago with the aim of combining local garbage collectors. Jacobs put in about $20 million in 1989. Eight years and about 250 acquisitions later, he sold the company to USA Waste Services Inc. -- known today as Waste Management Inc. -- for more than $2 billion.
Shortly after, Jacobs invested $50 million to start United Rentals, an equipment-rental company. It was one of the fastest operating companies to go from incorporation to initial public offering, listing on the New York Stock Exchange in December 1997, four months after it began. The company’s market value is now about $10.6 billion.
“Brad is a very big-picture thinker who has the strategic foresight to identify sectors of the economy that would benefit from scale,” Cary Kochman, head of North America M&A at Citigroup Inc., said in an e-mail.
After United Rentals, he looked at for-profit education and health care, two big industries with high growth rates and low capital requirements. Eventually he avoided them because of their dependence on regulation.
“If you were on the wrong side of regulators, they could put you out of business,” he said.
In 2011 he turned to the logistics business -- again, big and fragmented, he said. The industry includes companies from CH Robinson Worldwide Inc., which helps customers find the best way to deliver their products, to truckload carrier Knight Transportation Inc. He invested $150 million into Express-1 Expedited Solutions, replaced the board and became CEO. From a market value of $75 million, the company now is worth $1.4 billion.
XPO narrowed its losses during the second quarter to $13.8 million from $17.4 million last year, according to the company. Gross revenue during the three months through July quadrupled to $581 million.
Unlike his earlier successes, the logistics industry may not suit Jacobs’s consolidation strategy, according to Jack Atkins, a Little Rock, Arkansas-based analyst at Stephens Inc.
“As you look to the history of potential roll-ups in third-party logistics land, it’s the boulevard of broken dreams,” said Atkins, who maintains the only hold rating on XPO out of 14 analysts that cover the stock. “Roll-ups in this space have not gone well, and what long-term investors have been left with at the end of the day are businesses that have operations that don’t fit together in a cohesive strategy.”
Jacobs said he has created systems to avoid pitfalls in integrating new companies.
One thing that distinguishes Jacobs from other CEOs on acquiring sprees: he doesn’t use bankers.
“We don’t really need financial advice from banks. We need financing,” he said. “We have a lot of people who used to be bankers working here -- a lot of M&A professionals. We don’t really need M&A advice.”
Jacobs left prep school during his year junior year, without a diploma, after being recruited by Bennington College in Vermont. He later transferred to Brown University in Rhode Island, and left without getting a degree.
Jacobs has faced obstacles while on the other side of the negotiating table -- as a seller. In 2007, while leading United Rentals, Jacobs agreed to a $4 billion takeover by Cerberus Capital Management LP after shares dropped following earnings restatements for accounting errors. He stepped down as chairman shortly thereafter.
When the private-equity firm reneged on its bid due to what it said were weakening credit markets, United Rentals sued saying Cerberus was trying to extract a lower price. Delaware Chancery Court ruled against United Rentals, arguing that its executives should have known that Cerberus could pull out of the deal as long as it paid a $100 million breakup fee.
Jacobs’s investor fans include Marc Sulam, a former principal at hedge fund Healy Circle Capital. When he saw Jacobs plunk $150 million into XPO’s balance sheet three years ago, Sulam made his own initial investment in the company.
“Brad is somebody who, over the course of the past 20-plus years that I’ve known him, has created an inordinate amount of value,” said New York-based Sulam, who said XPO represents a “sizable” amount of his personal wealth.
Jacobs’s stake in XPO, including about 20 million shares and warrants held by him and his wife, is valued at about $500 million.
With 500 acquisitions and counting, Jacobs is far from stopping. XPO won’t be the last company he will build.
“Definitely not!” he said, adding, in an understatement, “I like doing deals.”