Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Allaway and I'm Joe.
Speaker 3: Why isn't thal Joe we like.
Speaker 2: Talking about the old economy on this podcast?
Speaker 4: Right?
Speaker 2: I don't even think when people use that term old economy,
Speaker 2: I think it's kind of unfair.
Speaker 3: It's funny. I was literally about to respond and say that, maybe,
Speaker 3: like this whole old economy new economy distinction, it's a
Speaker 3: little unfair. The old economy is still still here. It's
Speaker 3: not you know, it's not generative AI, but it's arguably
Speaker 3: maybe it's even more important the things that we call
Speaker 3: the old economy. You know, you couldn't have the new
Speaker 3: economy without without cooling a heater.
Speaker 2: This is exactly what I was gonna say, because, like
Speaker 2: the old economy and the actual business of making things
Speaker 2: and moving things, heating and cooling is very much enmeshed
Speaker 2: with the new economy, which is all about generative AI.
Speaker 2: And in order to have generative AI, you need data centers, right,
Speaker 2: And if there's one thing we know about data centers,
Speaker 2: it's that they consume vast amounts of both building material
Speaker 2: and electricity.
Speaker 3: And yeah, heating and cooling. So yes, you're absolutely right,
Speaker 3: we will no longer use the slur old economy. We
Speaker 3: will find some other other word. But yes, we like
Speaker 3: talking about industries in which physical things get built and
Speaker 3: then sold at a higher profit at a higher price
Speaker 3: for which they were built from and how how these
Speaker 3: things actually work.
Speaker 5: Yes, indeed, so we are going to be talking about
Speaker 5: that today.
Speaker 2: We also like occasionally talking about deals, and it's not
Speaker 2: every day that we get to talk about a deal
Speaker 2: that has literally just been announced and is I think,
Speaker 2: you know, one of the biggest deals that we've actually
Speaker 2: seen recently.
Speaker 3: That's right, it's a deal to our let's do it.
Speaker 2: Okay, So we do, in fact have the perfect guest.
Speaker 2: We're going to be speaking with Brad Jacobs. He's been
Speaker 2: on the show before and he is, of course the
Speaker 2: CEO and founder of QXO, which has just announced a
Speaker 2: huge deal to buy a company called top Build in
Speaker 2: the insulation space. They're paying seventeen billion and at the
Speaker 2: end of this acquisition, they expect to be the second
Speaker 2: largest publicly traded building products distributor in North America. So
Speaker 2: truly a melding of mergers and again the old slash
Speaker 2: New economy.
Speaker 5: Brad, welcome back to Odd Thoughts. Thanks so much for
Speaker 5: coming on.
Speaker 4: Oh my pleasure. Great to be here.
Speaker 5: Congrats on the deal.
Speaker 2: The first question I have to ask is is it
Speaker 2: even accurate to call this an acquisition right now? Because
Speaker 2: if you're paying seventeen billion for Top build looking at
Speaker 2: qxo's market cap, you guys are at like seventeen billion
Speaker 2: as well, This looks like a merger. This is so big,
Speaker 2: This basically looks like a merger.
Speaker 4: Yeah, a merger. I'll go with merger. Mergers fine, put
Speaker 4: in together two great.
Speaker 6: Companies and forming an even greater one.
Speaker 3: You know, it's funny, I hadn't heard of Top Build
Speaker 3: up until you know this morning. We're sorry yesterday when
Speaker 3: the news came out, there you're going to buy it?
Speaker 3: You know what I was thinking about, Like, America is incredible,
Speaker 3: Like this company, so it uh stocked now with the
Speaker 3: premium that's baked in today trading at four hundred and
Speaker 3: eighty four, This was a forty three dollars stock as
Speaker 3: recently is twenty eighteen. America is incredible, like these companies
Speaker 3: that sort of fly under most people's radars, can just do.
Speaker 3: You don't have to be in the videos of the
Speaker 3: world to make a lot of money.
Speaker 6: Well, I agree with that. You have to have a
Speaker 6: service or a product that there's demand for. Yeah, and
Speaker 6: you've got to give a great customer experience. And if
Speaker 6: you have those two things, you'll make a lot of money.
Speaker 2: All right, So walk us through the rationale for doing this,
Speaker 2: because again, like a huge deal, and it seems to
Speaker 2: have caught a few people off guard. They were expecting
Speaker 2: you to maybe buy you know, some smaller companies keep
Speaker 2: the roll up strategy going, but again, this one is
Speaker 2: very large.
Speaker 4: Oh yeah.
Speaker 6: So the acquisition of Beacon, following the acquisition of Kodiak,
Speaker 6: which is followed now by the acquisor to top Build,
Speaker 6: takes us from eleven months ago where we had no
Speaker 6: building products revenue, let alone EBITDAH to the second largest
Speaker 6: publicly traded building products distribute in North America with more
Speaker 6: than eighteen billion dollars in combined company revenue and more
Speaker 6: than two billion dollars of combined to justiba DAH. It's
Speaker 6: a big deal. It's a big deal in the industry,
Speaker 6: it's a big deal in the market as a whole.
Speaker 6: It's very creative to our earnings, meaningfully creative to our earnings.
Speaker 6: And when you look at the multiples, that's reasonable multiples.
Speaker 6: We're paying fourteen point nine times twenty twenty five EBITDA
Speaker 6: pre synergies and about eleven point eight times EBITDAH post synergies,
Speaker 6: and there's tons of synergies we can get. We're targeting
Speaker 6: three hundred million dollars or so of synergies over the
Speaker 6: ne five years.
Speaker 3: Just to zoom out for a little bit. Regular listeners,
Speaker 3: of course, know who Brad is. We've had him on
Speaker 3: the show several times. But just in case you don't,
Speaker 3: he is a serial entrepreneur. If there's ever a company
Speaker 3: and their chicker has XO in the handle, it almost
Speaker 3: certainly was founded by Brad.
Speaker 6: One exception, which one mobile.
Speaker 3: You didn't found out way.
Speaker 6: You didn't know. I wish I had had I got away,
Speaker 6: got away.
Speaker 3: But it's always these again, I hate words like real
Speaker 3: economy and old economy, but we can see physical economy,
Speaker 3: and it's like warehouses and trucking and freight brokerage and
Speaker 3: construction equipment rental and garbage stuff, like anything real and physical.
Speaker 3: That's what Brad's into He's found in numerous companies. He
Speaker 3: also wrote a book came out in twenty twenty four,
Speaker 3: How to Make a few billion dollars. And the reason
Speaker 3: I still have this job today is because I haven't
Speaker 3: gotten around to reading the book yet. Had I gotten
Speaker 3: around to reading the book yet, probably be a billionaire
Speaker 3: by now and I would be doing something different. But
Speaker 3: I'll get around to doing that eventually. One thing that's
Speaker 3: interesting though to me just learning about Top Build today.
Speaker 3: In addition to seeing their stock, they had also been
Speaker 3: a serial acquirer and in fact, it said like in
Speaker 3: one of their recent presentations, this has been one of
Speaker 3: their main strategies. So why don't you like talk about,
Speaker 3: like who is this company, Top Build? What do they do?
Speaker 3: Tell us a little bit about the history and the
Speaker 3: footprint of this company that you're buying.
Speaker 6: Top Build is the largest installer and distributor of insulation.
Speaker 6: And as you were just saying that, everybody needs insulation,
Speaker 6: Every house needs insulation in the walls, every office building
Speaker 6: needs insulation everywhere. It's a needed product and it's not
Speaker 6: going anywhere. It's not going to be disrupted by AI
Speaker 6: or l lams. It's just not going to go away. Yeah,
Speaker 6: So when we complete the merger, will be number one
Speaker 6: in insulation, will be the second biggest in roofing, will
Speaker 6: be number one in waterproofing, and we'll hold number one
Speaker 6: or number two positions in certain geographies within lumber and
Speaker 6: building materials. So we'll have a huge addressable market several
Speaker 6: hundred billion dollars.
Speaker 2: So I take the point that everyone needs insulation. This
Speaker 2: is definitely true, but we allude it to this in
Speaker 2: the intro. Data centers in particular need insulation. How much
Speaker 2: of this deal is the expectation that you're going to
Speaker 2: be getting a lot of business from the data center
Speaker 2: build out as well.
Speaker 6: Oh, we will get a lot of business from data centers,
Speaker 6: but not just on the insallation. Data centers need roofs too.
Speaker 6: Data centers need waterproofing very much. So data centers often
Speaker 6: need lumber related products. So data centers are big consumers
Speaker 6: of building products. Now, Top Build itself has single digit
Speaker 6: percentage exposure to data centers, but it's very fast growing.
Speaker 3: Wait, sorry say that how much exposure?
Speaker 6: Single digit percentage of the revenue, got it? But in
Speaker 6: terms of growth it's growing very very fast.
Speaker 3: Okay, So when we think about the installation market in general.
Speaker 3: How much is it residential, how much is it commercial?
Speaker 3: And is there a lot of overlap where do companies
Speaker 3: tend to specialize in one or the other.
Speaker 6: It's fairly evenly split. They have a little more residential
Speaker 6: than commercial, but they have both. Okay, they have both,
Speaker 6: and we have that as well, by the way, in
Speaker 6: the two companies we bought before this, Beacon and Codiac,
Speaker 6: we have residential customers, we have commercial customers, we have
Speaker 6: industrial customers, these municipal customers. Everybody needs building products. If
Speaker 6: there's a building, it's made of building products.
Speaker 3: And just to be clear on the nature of the
Speaker 3: business they do installation within the insulation supply chain, where
Speaker 3: do they sit exactly? Do they manufacture it or is
Speaker 3: it just distribution and installation?
Speaker 6: Like what do they do? They don't manufacture, Okay, they
Speaker 6: buy it and then they either resell it at high
Speaker 6: price to a contractor or they actually install it. They
Speaker 6: sell it and install it and to various cuss cotomercial.
Speaker 2: Okay, well, now I have a dumb question, but is
Speaker 2: there a quality differential when it comes to insulation, Like
Speaker 2: is there a particular type of insulation that a data
Speaker 2: center would need versus your run of the mill house.
Speaker 6: There's not too many different types of insallation, but there
Speaker 6: are different types, and the big manufacturers are ones like
Speaker 6: Owen's Corning or john Mansville or canalf Is another big one,
Speaker 6: So you know, big companies and very high quality stuff.
Speaker 6: So insulation has been around for a long time, but
Speaker 6: technology makes it better and better every decade.
Speaker 3: Where's it made insallation?
Speaker 6: It's mostly made in the United States, is it? Yeah?
Speaker 3: This seems to me. I was surprised. I remember the
Speaker 3: last time we talked to you about like roofing, and
Speaker 3: you mentioned how much shingle is still made in the US.
Speaker 3: Talk to us about like why is that? Why is
Speaker 3: this a particular type of good that is still largely
Speaker 3: What are the economics of it such that it still
Speaker 3: makes sense to manufacture it in United State?
Speaker 6: It's more about regulations, okay, So the types of building products,
Speaker 6: the regulations, the codes are different country to countries. So
Speaker 6: insallation in Europe is not quite the same as installation here.
Speaker 6: Roofing products in Europe not quite the same as it
Speaker 6: is over here. So waterproofing same thing, so slightly different
Speaker 6: rags and that makes it better to manufacture closer to
Speaker 6: where it's being used.
Speaker 2: So how did Top Build actually get on your radar?
Speaker 2: Did you initially approach them? Did they approach you?
Speaker 4: We approached them? How did that actually we approach them first?
Speaker 6: Yeah?
Speaker 2: Okay, So now I'm very curious because I know you
Speaker 2: have a lot of experience in M and A, and
Speaker 2: you know, a lot of people would describe your business
Speaker 2: as basically a roll up for building materials. But I
Speaker 2: also know from reading your book, and by the way, Joe,
Speaker 2: I am not yet a billionaire, but I did read
Speaker 2: the book. You have a very a very specialized process
Speaker 2: when you target a company to acquire them, including having
Speaker 2: a former CIA intelligence officer, one of the guy who
Speaker 2: I think like worked with live.
Speaker 4: He was on your podcast.
Speaker 5: Yeah, yeah, yes, yes, so did he did?
Speaker 2: He interview all the CEOs and they all went through
Speaker 2: background checks and that sort of thing.
Speaker 6: So so we do background checks. But we spent two
Speaker 6: days in our lawyer's offices here in New York and
Speaker 6: about fifteen members of the senior management team of Top
Speaker 6: Build came up, including the CEO and CFO, And yeah,
Speaker 6: we interviewed each one for like an hour and a
Speaker 6: half and got to know him and it checked out.
Speaker 6: Everything they said was true.
Speaker 3: I love that interview to you guys for an hour
Speaker 3: and a half, it's like, here's seventeen billion dollars. Sounds good.
Speaker 3: Now there's a I'm sure it's a little more complicated
Speaker 3: than that. What else goes in in the due diligence process.
Speaker 3: Do you go around and talk to customers?
Speaker 6: Oh? Yeah, so talk to us about that. Well, we
Speaker 6: have a lot of the same customers, have a lot
Speaker 6: of the same vendorsk big, big overlap. So top Bill
Speaker 6: is a very well known company. It's the number one
Speaker 6: company in its field, so it's pretty easy to check
Speaker 6: them out. So we knew what we were getting before
Speaker 6: we did those interviews over two days. But still you
Speaker 6: want to talk to the people. You want to find
Speaker 6: out where are the skeletons, and what are the risks,
Speaker 6: and what are the good things, and where's the opportunities
Speaker 6: and where's the upside and what are some things you
Speaker 6: can bring to the table, particularly in terms of technology,
Speaker 6: that could turbo charge the growth of the company. So
Speaker 6: those in person meetings are very important. It's not the
Speaker 6: only part of due diligence. Do a lot of stuff online.
Speaker 6: You do a lot of stuff with third party channel checks,
Speaker 6: but those in person meetings with the management team are
Speaker 6: absolutely crucial. I would never buy a company, any company
Speaker 6: without doing management interviews. That's the most important part of
Speaker 6: due diligence.
Speaker 5: It's funny.
Speaker 2: I was hanging out with some people over the weekend
Speaker 2: and I was hearing about some deals that they were
Speaker 2: doing in the AI space, including a pretty large deal
Speaker 2: that apparently they completed in an afternoon. And you can
Speaker 2: imagine what the due diligence process is on a deal
Speaker 2: that's completed in a single afternoon.
Speaker 4: I don't know how to do that yet.
Speaker 6: That's over my capabilities, but it doesn't take a long time.
Speaker 6: We're surgical and not overly intrusive in the due diligence,
Speaker 6: but the afternoons a little tighter.
Speaker 2: So what made you comfortable with the premium? Because again,
Speaker 2: twenty three percent on the existing share price of Top Build,
Speaker 2: that's a pretty you know, that's a pretty nice amount
Speaker 2: of money.
Speaker 6: It's a fair price. It's not a terribly high price.
Speaker 6: It's not terribly low price. When you look at multiples
Speaker 6: of EBIDAH, it's fourteen point nine times twenty twenty five
Speaker 6: EBITDAH pre synergies and about eleven point eight times EBITDAH
Speaker 6: post synergies the expected synergies. So now it's reasonably priced.
Speaker 6: It's a lower multiple than we trade at, which is
Speaker 6: very important because that's where you get the accretion, the
Speaker 6: accretion to earnings per share. This is going to be
Speaker 6: a massively accreative transaction for us.
Speaker 3: Talk to us about setting aside, like setting aside this aquigition,
Speaker 3: which we'll come back to. How does business feel over
Speaker 3: the last year, you know, just general economic conditions in
Speaker 3: the building materials distribution world. What's been the last year?
Speaker 6: Like super soft? Super super soft? Now super soft? Because
Speaker 6: demand in general in building and construction is soft as weak,
Speaker 6: and we're not immune to that. But we've mostly been
Speaker 6: in roofing up until recently. Now, roofing is a special
Speaker 6: animal because it's extremely affected by weather, meaning bad weather.
Speaker 6: You want to have. Bad weather is good weather for roofing,
Speaker 6: so you want to have you want to have this
Speaker 6: sleet and a lot of hailstorms and hurricanes and tornadoes.
Speaker 6: And I gotta tell you there's a lot of cognitive
Speaker 6: dissonance about that because all my life. I've watched television.
Speaker 6: You see a hurricane, like normal people, unless you're a sociopath,
Speaker 6: you feel bad. You feel, wow, it's too bad that
Speaker 6: these people are getting there.
Speaker 3: Wait, have you become a sociopath for you?
Speaker 6: No, no, no, no, definitely not becoming a.
Speaker 3: Social no, hell no, hell no.
Speaker 6: But my point is this, if a normal person watches
Speaker 6: television and sees a people's houses getting the roofs being
Speaker 6: blown off, usually you feel bad about that, You feel compassionate,
Speaker 6: you feel, oh, wow, it's too bad for them. Yeah,
Speaker 6: so there's a dissonance here because that's really good for
Speaker 6: the roofing business. One half of your brain is still
Speaker 6: a human and compassion and feeling bad for this on
Speaker 6: the other side of your Yeah, great, I gotta storm,
Speaker 6: gonna hail storm is not fantastic. These people's roofs are
Speaker 6: all go flying off, We're gonna get more business. So
Speaker 6: that the good or bad news, depending on your perspective,
Speaker 6: is in twenty twenty five, there really weren't any big storms.
Speaker 6: There weren't any name storm, big hurricanes, tornadoes, so that
Speaker 6: was bad. And compounding on that in the first quarter
Speaker 6: here you had the bad kind of bad weather which
Speaker 6: is snow and other bad weather that just slowed everything down,
Speaker 6: just stop business, but didn't create any demand from roof
Speaker 6: damage exactly. So the external conditions haven't been great. Now
Speaker 6: that said, I don't care because I'm not building a
Speaker 6: business for one year or two years or three years
Speaker 6: like I did in my previous companies. I'm building a strong, durable,
Speaker 6: iconic company that's going to be around for decades. And
Speaker 6: that's what I think. We're always thinking about long term.
Speaker 6: We're thinking five ten years. We're not thinking about a
Speaker 6: quarter or the year. If we have a choice on
Speaker 6: a decision for capital allocation or m and A or investments.
Speaker 6: We barely think about how's it going to affect this
Speaker 6: quarter this year. It's really how's it going to affect
Speaker 6: the long term?
Speaker 2: Were you impacted by the tariffs at all? Did that
Speaker 2: complicate the existing business?
Speaker 6: Not too much, because in roofing, which is what we've
Speaker 6: been up until Kodiak and our top Build, almost all
Speaker 6: of it is manufacturing in the United States, sold in
Speaker 6: the United States, or manufacturing Canada or sold in Canada,
Speaker 6: and we really don't have business overseas, so the terriffs
Speaker 6: didn't really affect us. Now it might have affected demand,
Speaker 6: distry production overall, it might have affected how much construction
Speaker 6: was happening, But directly we were not clauborate by the tariffs.
Speaker 6: The weather collaborate is a lot more than the terraffs.
Speaker 3: What is the main commodity input for an insallation?
Speaker 6: Oh, it's chemical. It's chemically created and it's refined in
Speaker 6: a manufacture with a lot of people looking like chemists.
Speaker 3: So like, is it petrochemical? Like if like oil prices
Speaker 3: were to surge, would that be a sort of like
Speaker 3: margin crimping factor for insulation prices.
Speaker 6: Well, I think we're better off with oil prices lower
Speaker 6: for demand, not so much for the cost of the goods,
Speaker 6: but lower oil prices there's more confidence and more demand.
Speaker 6: But the real factor for building products is mortgage rates.
Speaker 6: So mortgage rates when they were seven and a half
Speaker 6: percent was really bad because people had three percent mortgages
Speaker 6: or three and a quarter percent mortgages, and people just
Speaker 6: have a problem paying off at three percent mortgage and
Speaker 6: taking out a seven percent mortgage. They're now down a
Speaker 6: bit six and a half percent, but they got to
Speaker 6: come down more so when the Iran war finally ends
Speaker 6: and it'll end someday and interest rates come down, which
Speaker 6: they will under this administration. It's pretty good odds that
Speaker 6: mortgage rates will come down and business will start booming.
Speaker 2: Yeah, this is what I wanted to ask, which is
Speaker 2: I guess financing availability at the moment, because clearly we
Speaker 2: are in the midst of this Iran situation and we
Speaker 2: have seen some very volatile markets out there. We've seen
Speaker 2: traders start to ratchet down I guess their expectations for
Speaker 2: a rate cut later this year. What's financing been like
Speaker 2: for you at QXO.
Speaker 6: We have no problem getting access to capital. That's not
Speaker 6: been an issue for us. We've raised since I started
Speaker 6: the company almost a couple of years ago. We've raised
Speaker 6: something like fifteen billion dollars and fairly easily on this
Speaker 6: transaction here. In addition to that, we've got seventeen billion
Speaker 6: dollars now. Part of that but roughly about fifty five
Speaker 6: percent of it is going to be in the form
Speaker 6: of stock, but the other's cash and raise it. We
Speaker 6: got debt commitments from Morgan Stanley and from Wells Fargo
Speaker 6: and from Barclay's and pull that all together about a week.
Speaker 3: Is synergies when you talk about the future cost savings.
Speaker 3: Is that a euphemism for layoffs?
Speaker 6: No, just the opposite is to grow the business, is
Speaker 6: to figure out ways that you can cross sell customers.
Speaker 6: A contractor who is selling roofing is used is buying
Speaker 6: roofing and putting that into their construction. Pretty good chance
Speaker 6: they're going to want insulation in what they're building too.
Speaker 6: So we also sell windows and doors, for example, and
Speaker 6: all of our customers have some issue, some exposure to
Speaker 6: windows and doors and will be number one in insulation,
Speaker 6: number two in roofing, number one in waterproofing, and number
Speaker 6: one or number two in the key geography served within
Speaker 6: lumber building materials. There's a lot of cross selling between insul, roofing, waterproofing,
Speaker 6: and lumber.
Speaker 2: We'd say more about that because you know, we hear
Speaker 2: from executives all the time when they talk about synergies
Speaker 2: and kind of general terms. But what exactly is I guess,
Speaker 2: the low hanging fruit in this particular deal, Like, what
Speaker 2: is it that you're able to do from day one
Speaker 2: versus what you're able to do in like a year
Speaker 2: or two.
Speaker 6: Well, the first thing that we do when we go
Speaker 6: into buy a company, whether it's Top Build or anybody
Speaker 6: else is. We meet with as many people as we
Speaker 6: can and we ask them to just step back, get
Speaker 6: out of their normal comfort zone and think about what
Speaker 6: would be the perfect circumstances and tools and techniques and
Speaker 6: repositioning the company to growing faster. Where are their pain points?
Speaker 6: Where are things that are holding them back? And we
Speaker 6: collaboratively put together a business plan. Now I already know,
Speaker 6: like with every other acquisition we've done. Ever, technology is
Speaker 6: going to be the first thing. Technology today slows people
Speaker 6: build down in the market. They've got to get the
Speaker 6: latest technology, the greatest warehouse management systems, which we'll bring
Speaker 6: to the table, the greatest TMS, transportation management systems, the
Speaker 6: greatest ERP, which is also using a CRM that's AI
Speaker 6: generated to empower the sales force to get productivity up.
Speaker 6: Technology is the number one enabler of synergies. But there's
Speaker 6: going to be so many synergies here. The cross selling
Speaker 6: is a big one. There are some cost savings when
Speaker 6: you're a bigger player. We're going to be the second
Speaker 6: biggest publicly traded building products distributor. We will get because
Speaker 6: we deserve a better price from the manufacturers. I mean,
Speaker 6: bigger customers get bigger discounts, bigger rebates than the smaller customers.
Speaker 6: So a building products distributor, like any distributor, makes money
Speaker 6: by buying products as cheap as possible and then selling
Speaker 6: them that reasonable price. That's a markup from what you're buying.
Speaker 6: These are the two main things you're buying and you're
Speaker 6: selling now. In the meanwhile, under that, you have to
Speaker 6: manage your costs. Make sure your costs are efficient and
Speaker 6: lean and not wasteful and not inefficient. We can do
Speaker 6: that too, but that's not really where you make the money.
Speaker 6: You don't make the money on slashing costs. That's what
Speaker 6: private you guys do. That's not what I do. What
Speaker 6: I do is I invest in the business. I invest
Speaker 6: in the people. I invest in their learning and development,
Speaker 6: invest in their training, I invest in their careers. We
Speaker 6: tie the compensation to results. We figure out what are
Speaker 6: the right KPIs to keep performance indicators, what are the
Speaker 6: right metrics that are that mark success in this business,
Speaker 6: and then we tie the compensation to that and let people,
Speaker 6: out of self interest, do great for the company and
Speaker 6: create organic revenue growth on the top side, and then
Speaker 6: margin expansion on the bottom side.
Speaker 3: I love a business. There's just buying something and finding
Speaker 3: an opportunity, you know, buying something, assembling it, making it
Speaker 3: so nice, and then selling it for more. It's old fashioned,
Speaker 3: It's honest. I respect it a lot. I'm glad that
Speaker 3: you mentioned the alphabet soup of different types of enterprise
Speaker 3: software that a business has. One of the biggest themes,
Speaker 3: as you know, in the market this year really maybe
Speaker 3: over the last six months, but definitely in the last year,
Speaker 3: is this idea that the relationship between businesses and their
Speaker 3: software vendors is going to change and the reason for
Speaker 3: this is AI and maybe you know, maybe some businesses
Speaker 3: that didn't have that expertise in the house, like maybe
Speaker 3: we'll build this solution on our own rather than hire,
Speaker 3: et cetera. Sitting aside this deal right now. Has your
Speaker 3: in the last year, has your relationship with software vendors?
Speaker 3: Does it feel like the leverage is changing things to AI?
Speaker 3: Whereas maybe you at the negotiating table when you're re
Speaker 3: uping negotiation for seats, et cetera, where you have a
Speaker 3: little bit more you can cancel deals or get better pricing,
Speaker 3: talk to us about what's going on.
Speaker 6: Not really I mean a lot, a lot of our
Speaker 6: technology is homegrown. We have a lot of people we've
Speaker 6: hired from Microsoft and from other big.
Speaker 3: Sure, but you're not like building your own like payroll software, right.
Speaker 6: Well, we still we still outsourced.
Speaker 3: That's what I'm saying, Like that there's a lot of
Speaker 3: anxiety in the market that all these legacy companies that
Speaker 3: do something simple like payroll a look at you've seen
Speaker 3: their share prices. I don't need to show them to long.
Speaker 6: Term job that's true. Long term that's true, okay, but
Speaker 6: long term that's true for pretty much every job and
Speaker 6: every industry in every company is AI and robotics and
Speaker 6: automation is going to disrupt quite a number of jobs.
Speaker 6: But having said that, the productivity of the economy is
Speaker 6: going to be so much greater that we can afford
Speaker 6: to have more free time and still enjoy nice lifestyle.
Speaker 6: So I'm not worried about that.
Speaker 3: No, not worried, But I do have What I'm saying
Speaker 3: is like, are you exploiting? Like do you have any
Speaker 3: opportunities to like are you a beneficiary of these tools? Oh? Yeah,
Speaker 3: challenge talk about yeah?
Speaker 6: Absolutely. So I've been a CEO since nineteen seventy nine.
Speaker 6: It's the only job, the only job you've ever had.
Speaker 6: I've never been more productive by a long shot than
Speaker 6: I am right now. Reason being, we have AI taking
Speaker 6: notes of all the important meetings around the company. So
Speaker 6: at the end of the day, I can get a
Speaker 6: dozen readouts of AI generated summaries everything that's going into
Speaker 6: the company. Stuff that in the old days before we
Speaker 6: have the AI note taking either it wouldn't reach to me,
Speaker 6: or would reach me. It wouldn't reach me, or it
Speaker 6: would take two or three months before it got to me.
Speaker 6: So as a CEO, now you know what's going on
Speaker 6: in the company, all over the company right away, in
Speaker 6: real time. And when you have longer meetings, the AI
Speaker 6: will do sentiment analysis. The AI will look at trends.
Speaker 6: We can do customer surveys, employee surveys using AI. That
Speaker 6: so powerful now, I mean you can get real good
Speaker 6: analysis from it. It's it's hugely powerful. So you can
Speaker 6: see where this is going. AI is going to make
Speaker 6: Corporate America far more efficient than it is right now.
Speaker 6: Everything that's measurable will be measured, analyzed and then suggesting
Speaker 6: how to improve it in real time. It's very exciting.
Speaker 6: Time to be alive and be in the corporate world.
Speaker 2: Just going back to the QXO business. So I know
Speaker 2: I keep saying this is a very big deal, and
Speaker 2: it is, and it immediately vaunts you to, as we said,
Speaker 2: the second largest publicly traded building products distributor in North America.
Speaker 2: As you get bigger and as you make more of
Speaker 2: these acquisitions, you know fairly quickly you've done like three
Speaker 2: or four now in a little over a year, I think,
Speaker 2: or maybe a little less than a year. Do you
Speaker 2: worry about antitrust at all?
Speaker 6: Well, we're not at a point where our market share
Speaker 6: is so huge that it would have any effect on
Speaker 6: raising prices to the customer, So no, I don't worry
Speaker 6: about that right now, all right.
Speaker 2: So on that note, what does the universe of potential
Speaker 2: targets look like to you right now? And should we
Speaker 2: expect that your next deal is going to be quite
Speaker 2: as large?
Speaker 6: Well, we have a big pipe and we're always talking
Speaker 6: to many, many acquisitions at the same time. A big
Speaker 6: mistake a lot of roll ups do, or even corporate acquires,
Speaker 6: is they kind of dabble in M and A. They
Speaker 6: don't have like a scientific, organized process, so they work
Speaker 6: on one deal, they fall in love with the deal,
Speaker 6: and they overpay. It's like the biggest crime, the biggest
Speaker 6: mistake you can make as an acquirer is to overpay.
Speaker 6: People say, oh, well, don't worry about it, you'll forget
Speaker 6: about the purchase price the next day. Well, your balance
Speaker 6: sheet never ever forgets the purchase price. That's money that
Speaker 6: you've wired out of your account. It just someone else's
Speaker 6: account not coming back. So you got to watch the
Speaker 6: purchase price quite closely.
Speaker 3: What's your advice? You know, Like, one of the things
Speaker 3: that I'm aware of over the last ten fifteen years
Speaker 3: is the rise of like I think they're called like
Speaker 3: search funds or something. You get like some guy who's
Speaker 3: like an MBA. Maybe at warton they don't know what
Speaker 3: they want to do. They raise some money for their
Speaker 3: friends and they're like, we're gonna go buy this local
Speaker 3: like pool supply company or whatever, HVAC, and we're going
Speaker 3: to like six sigmad up and then we're going to
Speaker 3: make some money, et cetera. I think you're probably a
Speaker 3: god to these people because you have the art of
Speaker 3: buying companies down as a practice. Where do you see
Speaker 3: them go wrong? Typically, what would be your advice to
Speaker 3: these types who think, you know what, I'm going to
Speaker 3: buy an old fashioned business and make it run great.
Speaker 3: Where do you see people go wrong in this?
Speaker 6: Most of them go wrong. Most of them go wrong
Speaker 6: because they're really not operators. They're really just promoters. They're
Speaker 6: financial guys, and that's fine, but they don't integrate and
Speaker 6: optimize the businesses. Now they can still make money on
Speaker 6: the spread. In other words, you see some of these
Speaker 6: smaller roll ups they buy a bunch of companies that
Speaker 6: whether veterinarians or car washes or whatever, and they buy
Speaker 6: them at single digit multiples, and then suddenly they're one
Speaker 6: hundred to two hundred million dollars of the bidah and
Speaker 6: they say, wow, I'm a big company. I should get
Speaker 6: a double digit multiple. And oftentimes that works. That's not
Speaker 6: how we make money. We make money on yes, buying
Speaker 6: companies at a lower multiple than we raise capital at,
Speaker 6: then integrating them, optimizing them, and proving them, making yourself
Speaker 6: more valuable to the customer, make yourself a real exciting
Speaker 6: place to work for the employees, making a real good,
Speaker 6: long term business plan that creates value for everyone in
Speaker 6: the ecosystem. That's not what these smaller rollups do. These
Speaker 6: smaller roll ups are really simply playing the arbitrage between
Speaker 6: what they buy on small companies and then aggregating them
Speaker 6: to get a higher multiple.
Speaker 3: You know, I asked you if the synergies were euphemism
Speaker 3: for layoffs, and you quickly shot that down. You know,
Speaker 3: one of the things that Warren Buffett said from time
Speaker 3: to time is like people who like family owned businesses,
Speaker 3: some of these smaller businesses they like selling to Warren Buffett.
Speaker 3: They felt like, Okay, this company that I've worked with
Speaker 3: a built for a long time, it's going to be
Speaker 3: in good hands. Maybe you'll give Warren Buffett a slightly
Speaker 3: better price than the other guy who came knocking. Do
Speaker 3: you feel like, from your perspective, it's important that the
Speaker 3: would be seller they like you, that they feel that
Speaker 3: this thing that they work to build is going to
Speaker 3: be in good hands, and is that part of your
Speaker 3: long term strategy?
Speaker 6: Yeah?
Speaker 4: I do.
Speaker 6: When you're selling a company, it's kind of emotional thing.
Speaker 6: I mean, you're not going to sell a company for
Speaker 6: like twenty percent less just because you like the guy.
Speaker 6: But you don't necessarily go with the highest bidder every
Speaker 6: time Now, it depends who you are. If you're private
Speaker 6: equity owned, yeah, you probably will go with the highest
Speaker 6: bidder because you're going away and you really don't care.
Speaker 6: If you're a privately owned company by a family, you
Speaker 6: care very much about who you sell the company to
Speaker 6: because it's your legacy. Then maybe there's relatives, there's local communities.
Speaker 6: It's a big deal. They want to make sure that
Speaker 6: you're going to be good steward for something they've built
Speaker 6: up over ten, twenty, sometimes thirty years. So yeah, it
Speaker 6: does make a big difference.
Speaker 5: Yeah, I'm going to put you on the spot now.
Speaker 2: But when you were negotiating on the top build deal,
Speaker 2: what was like the biggest sticking point that you had
Speaker 2: to haggle out. What was the biggest point of contention.
Speaker 6: Well, it's always price, because the buyer wants the lowest
Speaker 6: possible price and the seller wants the highest possible price.
Speaker 6: But we found a compromise, We found something in the
Speaker 6: middle that was fair for them and for us. That
Speaker 6: was really the main sticking point. The other stuff we
Speaker 6: saw eye to eye. The very similar culture is a
Speaker 6: lot of different ways that good operators. We're good operators.
Speaker 6: They've done a lot of M and A. They've done
Speaker 6: a few dozen deals that built up the company. We're
Speaker 6: big in M and A, you know, as you know,
Speaker 6: I've done about my teams and I have done over
Speaker 6: five hundred acquisitions. So there's a lot of stuff in
Speaker 6: common that we had a lot of mutual affinity and
Speaker 6: respect over By the.
Speaker 3: Way, I know this is no longer your thing anymore,
Speaker 3: but I'm just looking at some of the other companies
Speaker 3: in the the Exo family XPO that stuck is on
Speaker 3: an absolute ear and I've been seeing trucking is like
Speaker 3: kind of back, like trucking is hot these days. Can
Speaker 3: you talk a little bit about what's going on in freight?
Speaker 3: And obviously, even though it's like your main focus these days,
Speaker 3: I'm sure your business touches freight every single day. Why
Speaker 3: is freight so hot?
Speaker 6: Again, Well, freight isn't so hot across the board. Okay,
Speaker 6: some companies are still, you know, not not doing so well.
Speaker 6: In that Now XPO, under Mario and Mario Harrek leadership,
Speaker 6: it's doing fantastic. I attribute that mainly to Mario and
Speaker 6: the team. The execution of the business plan has been fantastic,
Speaker 6: just laser like surgical getting the damages down, getting the
Speaker 6: on time up, improving the customer experience. It's just an
Speaker 6: amazing job at it. It's just executed very very very
Speaker 6: very well on that and that's why the stock has
Speaker 6: performed so well. But it's management matters in any company,
Speaker 6: in any industry. Management matters a lot. You can have
Speaker 6: a strong management team who understands how you make money,
Speaker 6: has the nose for money, has the analytical capabilities of
Speaker 6: knowing what's important and what's not important, treats their employees right,
Speaker 6: treats their customers right, treats their vendors right, and they'll
Speaker 6: make a lot of money. And you'll have the same
Speaker 6: exact business across the street with not so sharp management.
Speaker 6: They don't treat their customers right, they don't treat their
Speaker 6: employees right, they don't treat their vendors right, and boom,
Speaker 6: this company doesn't do so well. So management matters matters
Speaker 6: a real lot.
Speaker 2: But again, I know you're not, you know, on a
Speaker 2: day to day basis with XBO now, but do you
Speaker 2: get the sense that the trucking cycle has turned that maybe? Yeah,
Speaker 2: a meaningful uptick in frame.
Speaker 6: There are several important Guruz analysts in the industry experts
Speaker 6: in trucking who have called a turn in the last
Speaker 6: couple of months. We'll see, you know, a couple months
Speaker 6: doesn't make a trend yet, but at the time it
Speaker 6: has looks like it's inflected. It looks like there's more
Speaker 6: goods moving, there's more freight moving. Industrial America's starting to
Speaker 6: get a little bit better, there's more palettes on the road.
Speaker 6: It looks like trucking has gotten better. But it's early
Speaker 6: days still.
Speaker 3: I just have one last question. I guess it's basically
Speaker 3: about the business environment. It's so obviously interest rates are
Speaker 3: going to be a huge factor out of your control though,
Speaker 3: et cetera. So what can you do about it, whether
Speaker 3: out of your control, oil price is going to be
Speaker 3: a factor, or energy price is going to be a
Speaker 3: factor in any sort of real goods space, another thing
Speaker 3: that's out of your control. But like, here's the weird thing,
Speaker 3: and I think a lot of people have like this
Speaker 3: is the hard thing that a lot of people have
Speaker 3: a hard time reconciling, which is that like the last
Speaker 3: couple of years, maybe the last several years, last couple
Speaker 3: of years, they've felt pretty chaotic. There's obvious, there's a
Speaker 3: war going on right now. We had this huge trade
Speaker 3: shock last year, et cetera. Some of the tariffs gout
Speaker 3: water are down a little bit, but it's still a
Speaker 3: high level of uncertainty. And you know, we know consumer
Speaker 3: sentiments pretty negative, et cetera, and even business sentiment when
Speaker 3: they read the regional surveys not that great. And yet
Speaker 3: by and large, corporate America seems to be doing well
Speaker 3: and make a ton of money. And you wouldn't necessarily know,
Speaker 3: especially if you look at the stock market, that there
Speaker 3: is all is this uncertainty going on. Do you feel
Speaker 3: a relationship between like the chaos that you read about
Speaker 3: in the news and the choices that businesses make on
Speaker 3: the day to day to either invest or not.
Speaker 6: Of course, so all the things you mentioned, energy prices,
Speaker 6: interest rates, et cetera. That affects business. So in terms
Speaker 6: of capital allocation, that really matters. Now, you can always
Speaker 6: make money if you've got a smart management team. In
Speaker 6: every part of the cycle, the top, the bottom, of
Speaker 6: the middle, there's always a play. There's always way to
Speaker 6: make money. Now, it's different in different parts of the cycle.
Speaker 6: When things are depressed, you can buy back your stock,
Speaker 6: you can do m and A multiples are really high.
Speaker 6: You can make a dividend and use stock for stock
Speaker 6: deals with companies. So there's different plays at different parts
Speaker 6: of the cycle. But people have the nose for money.
Speaker 6: We'll be able to figure out how to make a
Speaker 6: buck in any part of the cycle.
Speaker 2: I got to read your book, all right, Brad, We're
Speaker 2: going to leave it there, but thank you so much
Speaker 2: for coming back on all thoughts to explain the latest deal.
Speaker 5: Really appreciate it. Oh wait, I should ask.
Speaker 2: Before we let you go. Any hints on the next target.
Speaker 2: You have roofing, you have waterproofing, you have insulation, what's next, Tracy.
Speaker 4: We don't look at just one thing at a time.
Speaker 6: That's what we that's our MO in terms of M
Speaker 6: and A is look at cast a wide net, talk
Speaker 6: to lots of different acquisition candidates at the same time,
Speaker 6: move them all all forward ahead like a funnel, and
Speaker 6: see who gets the finish line. That way, you're relaxed
Speaker 6: about it. You don't have a gun to your head
Speaker 6: about a specific deal. So it's not like I'm being
Speaker 6: coy and not telling you the next deal. I don't know.
Speaker 6: We're looking at lots of different things. We'll see when
Speaker 6: and which company that stars line up for.
Speaker 2: All right, Well, I can tell you in the Northeast
Speaker 2: a lot of people are looking at wood burners at
Speaker 2: the moment because the cost of heating oil has gone
Speaker 2: up quite a bit. So maybe that maybe there's something
Speaker 2: there there you go. I'm saying this out of my
Speaker 2: own self interest. Okay, Brad Jacobs, thank you so much
Speaker 2: for coming back on a los plea mine, Joe. Did
Speaker 2: I tell you last year a big XPO truck got
Speaker 2: stuck in our driveway?
Speaker 3: You should have asked Brad about that. Oh, he's not
Speaker 3: like I think it's his responsibility.
Speaker 5: But I did think it was pretty funny.
Speaker 2: I resisted the urge to call him and send a
Speaker 2: photo of this giant truck like stuck in the mud,
Speaker 2: but I felt bad for the driver.
Speaker 3: Does your place in Connecticut need insulation?
Speaker 1: Yes?
Speaker 5: It does.
Speaker 2: Actually, so I'm a potential customer, and I'll be watching
Speaker 2: what happens with pricing after all these synergies very closely, yes,
Speaker 2: but always interesting having a hat on. And I do
Speaker 2: think he approaches he seems to approach M and A
Speaker 2: a little bit differently to a lot of other people.
Speaker 3: Well, it's interesting to think about. Like, one thing I
Speaker 3: really have come to appreciate talking with him is the
Speaker 3: degree to which, like hes he mentioned, he's done O
Speaker 3: our five hundred deals, So it's like, what is he
Speaker 3: what are you really good at it your company? For him,
Speaker 3: the thing that he really is into this deal is
Speaker 3: buying other companies, right, Like you get the impression that
Speaker 3: there are like companies where it's like, Okay, the main
Speaker 3: thing that we do is we sell roofing materials, and
Speaker 3: from time to time we might make an acquisition. But
Speaker 3: it's also pretty clear that from his perspective, like the
Speaker 3: acquisition process is part of the sort of the core
Speaker 3: competency of any business that he actually runs, which I
Speaker 3: find to be pretty interesting.
Speaker 2: Yeah.
Speaker 5: Absolutely.
Speaker 2: And the other thing that that was interesting about that
Speaker 2: conversation is that AI build out Yeah yeah, and the
Speaker 2: idea that like, Okay, at the moment, data centers might
Speaker 2: be I think you said single percentage of top builds business,
Speaker 2: but growing very quickly, and so you could see the
Speaker 2: potential there.
Speaker 3: And also like the idea we just talked about it
Speaker 3: a little bit. But I've never been to CEO of
Speaker 3: a really big company, but I've managed a time smaller
Speaker 3: teams within a company, and like one of the trickiest
Speaker 3: things is like having like true visibility into the operation,
Speaker 3: you know, et cetera, and I know you know, and
Speaker 3: so like thinking about like as like, Okay, the CEO
Speaker 3: could see everything to some extent, summarize structured in some
Speaker 3: way at a level that was pretty that's different. It'd
Speaker 3: be interesting to talk more with someone just about how
Speaker 3: being a CEO having a line of sight into your
Speaker 3: own business is changing in the world of like AI
Speaker 3: note taking and stuff like that.
Speaker 5: Yeah, no, totally.
Speaker 2: I mean it sounds like it's changing pretty last for
Speaker 2: what Brad was saying, Okay.
Speaker 3: Well shall we leave it there, Let's save it there.
Speaker 2: This has been another episode of the Authoughts podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at The Stalwart.
Speaker 3: Follow our producers Kerman Rodriguez at Kerman armand Dash Ol
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Speaker 5: Thanks for listening