To meet the rising demands of online shopping and the internet economy, XPO Logistics tapped Morgan Stanley for ways to finance its global growth.
In the middle of a heatwave, the air-conditioner takes its last gasp. Out comes the mobile phone, and within 10 minutes a replacement can be on its way, along with someone to install it first thing in the morning.
The online shopping experience is now so smooth, that goods seem to appear on our doorstep at the wave of a wand. One of the wizards behind the magic? Brad Jacobs, an entrepreneur who early on saw the potential of optimizing the traditional logistics industry to meet the needs and challenges of a growing eCommerce economy.
So, in 2011, Jacobs bought a controlling stake in a small company called Express-1, renamed it XPO Logistics,1 and began to recast the supply chain foundation of internet commerce. Six years and 17 acquisitions later,2 XPO Logistics is now ranked the largest logistics company in the U.S. and second largest in the world for contract logistics and freight brokerage.3 The company logged almost $15 billion in revenues4 in 2016 and employs more than 90,000 employees in 31 countries.5
“It would be interesting to know what the transportation and logistics businesses would look like in the U.S. today, if XPO had not done so many acquisitions,” says Eli Gross, head of Morgan Stanley’s Transportation Investment Banking group. “This kind of growth, especially in tandem with a rapid shift in leadership position over such a short period of time, is rare in any industry.”
Morgan Stanley has underwritten some $10 billion of debt and equity financing for XPO since 2012, capital that was essential to developing the global footprint and range of solutions that XPO offers to more than 50,000 customers.6 XPO also initiated a technological overhaul, turning warehouses into high-tech hubs using robotics, drones and wearables, while creating a cloud-based platform that uses big data analytics to help eCommerce companies know what to stock in anticipation of future demand.7
XPO has been consolidating a fragmented industry, buying companies that fit its growth strategy, and building a worldwide network. “Not everyone can move as fast as XPO can, and the fact that the business model required multiple acquisitions over a short period of time meant that the financing needs were more complex,” explains Guru Gupta, a Managing Director and Gross’s colleague. “We’ve been advising XPO for many years now, and we understand the financial logistics needed to ensure that XPO executes acquisitions in a fast, cost-efficient and market-friendly manner.”
Jacobs is focused on remaining on the front foot and further growing XPO through acquisitions when the opportunities are strategically and financially compelling.8 To do this, he once again turned to Morgan Stanley this past summer to help XPO secure capital for potential future acquisitions. This time, Morgan Stanley proposed a solution specifically suited to the company’s needs, and one that reflects the market’s high degree of confidence in XPO’s strategy.
In July, XPO raised $665 million of equity capital, consisting of the immediate issuance of five million shares, as well as the sale of another six million shares at the same price, but to be issued in the future when XPO needs the funding. This “forward sale” of six million shares reduces the upfront dilution of the total $665 million offering, but still locks in July’s stock price. Having the equity capital raise done before an acquisition is completed helps give Jacobs more certainty about the cost of financing, before he begins negotiations with a target company.
“Brad Jacobs is a great example of how it’s not just the nature of a company’s financial needs that dictates a financing strategy, but the CEO’s own personal business style,” says Paul Donahue, Head of Equity Capital Markets in the Americas for Morgan Stanley. “Pre-funding an acquisition in the equity markets generally requires a lot of conviction on all sides that an acquisition will be made that returns more than the cost of capital."
Pre-funding future acquisitions is a departure from the typical acquisition-finance approach, where companies think of one acquisition at a time and line up financing after reaching a purchase agreement, not before.
But having the funding lined up before visiting target companies is integral to Jacobs’ negotiating style. “His secret to success, when it comes to acquiring multiple companies in a handful of years, is staying behind the scenes. He rarely buys companies through an auction process,” says Gupta. “He visits companies before they know they want to sell, convinces them of his strategy, and clinches the deal by showing he already has the financing capacity.”
This time around he is positioned to do that again, knowing that he’s managing his own flow of funds as efficiently as XPO manages its customers’ flow of goods.