Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stirred the merger and acquisition space once again with its announcement that it is about to acquire multinational eye health firm, Bausch & Lomb, for $8.7 billion in cash. Of the total amount, $4.5 billion will be paid to an investor group led by private equity firm Warburg Pincus, while the remaining amount will go toward repaying Bausch & Lomb’s outstanding debt. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has lined up a combination of debt and equity offerings to raise funds for the acquisition.
Bausch & Lomb has a great deal of history to their credit having invented the first soft contact lens. The company’s business portfolio is comprised of eye health products within three main business units, namely pharmaceutical, vision care, and surgical divisions. Following the acquisition, Bausch & Lomb is likely to become Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s ophthalmology division, boosting the latter’s existing portfolio of ophthalmology products. All cash deals carry a higher risk as opposed to share swap transactions and as such, it is an indicator that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is looking forward to make it a success.
Why Valeant agreed to the deal
It is not difficult to see why Valeant Pharmaceuticals Intl Inc (NYSE:VRX) agreed to this aggressive deal. The transaction is likely to result in annual cost savings of at least $800 million by the end of 2014. In addition, the acquisition will start contributing to Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s bottom line from day one. Valeant expects the transaction will expand its eye care portfolio’s annual revenue of more than $3.5 billion. This will be quite a shift in focus for the company which has largely focused on dermatology so far. The expansion of the lucrative ophthalmology business is largely seen as positive by the market even though the acquisition is heavily funded by debt.
The Cooper Companies, Inc. (NYSE:COO) among indirect gainers
The deal also bodes well for The Cooper Companies, Inc. (NYSE:COO), which is a contact lens manufacturer and direct competitor of Bausch & Lomb. Wells Fargo analyst Larry Biegelsen projects that Valeant is likely to focus more on Bausch & Lomb’s pharmaceutical business than its contact lens business. This may seem baseless on the surface, but there is some element of truth in this logic as the stock gained nearly 4% after the announcement of the deal.
Bausch & Lomb had also filed for an initial public offering (IPO) which stands to be negated now. Absence of a major rival among listed companies is also a factor in why the stock popped. Besides, the company is doing reasonably well in its business. In the quarter ended Jan. 31, The Cooper Companies, Inc. (NYSE:COO) reported a 16.5% jump in revenue to $379.8 million apart from better margins. As a result, net profit saw jumped to $74.7 million, up from $54.6 million. The company uses moderate debt in its capital structure, underlined by a debt-equity ratio of 0.18.
The deal has once again ignited a debate as to whether aggressive inorganic growth strategy is the way forward. Valeant has a debt-equity ratio of 2 as of now and this metric is only likely to go up from here as it takes on more debt. So far, the acquisition approach has worked for companies like Actavis Inc (NYSE:ACT) which is a generics player. Actavis Inc (NYSE:ACT) recently announced it would take over its competitor Warner Chilcott Plc (NASDAQ:WCRX). It is unlikely we have heard the last from Actavis Inc (NYSE:ACT) as the company itself remains an acquisition target. Among the interested parties were Valeant, Novartis AG (ADR) (NYSE:NVS), and Mylan. Valeant must now be out of the race but Novartis AG (ADR) (NYSE:NVS) has ample room for a big acquisition.
With its forward price earnings ratio of 13.6 and a debt equity ratio of 1.8, Actavis Inc (NYSE:ACT) has a lot going in its favor. For the latest quarter, its revenue went up 24% to $1.9 billion, with the company receiving a strong push from its international business. Although the bottom-line was impacted by acquisition related charges, adjusted EBITDA jumped 26.2% to $463.6 million. Investors’ confidence in Actavis Inc (NYSE:ACT)’s strategy is clearly visible in its surging stock which has gone up 28% over the last month or so.
Foolish bottom line
While the debate continues, companies focused on acquisition-led growth are not letting opportunities slip away. Given the inherent risks with this business model, going long in steady stocks such as The Cooper Companies, Inc. (NYSE:COO) may not be a bad idea.
While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term.
The article Valeant Buys Bausch & Lomb, Boosts Cooper Companies and Actavis originally appeared on Fool.com.
Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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