How Brad Jacobs Will Invest $4.5 Billion to Reshape Building Supplies

25:09Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. See mintmobile.com. Well, since I mentioned conversations with other companies, here's something I always wanted to ask a serial roll-upper, if you will, or a serial M &A person. Warren Buffett is still on my list to ask this question, but maybe one day. Call him. Just call him. Yeah, maybe I will. He takes calls. When you approach a company, how do you actually do it? What's that initial contact like? Very straightforward. You send a DM on X slash Twitter. I just call somebody. I just call them up and say, hey, you know, I'm Brad Jacobs.

25:46If you haven't heard of me, I'm trying to do some acquisitions. Have a book to sell. There you go. $3 every time you buy. And I could have an interest in buying your company. I don't know yet. I've got to learn more. But I could have an interest in, you know, the reaction usually is one of two things. It's like, look, I'm happy to meet you. Could be an interesting guy, but we're not selling the company. That's like sometimes true and sometimes baloney. And other times people say, hey, you know, at the right price, why not? Come on over. I find a different reaction depending on who the seller is.

26:18So there's a spectrum of types of folks. The private family companies are great because I call them up and they say, yeah, come on over. And it usually turns into like a three-day event where we're just hanging out, meeting the people, touring the facilities. And I really understand the business. And I appreciate that. I reciprocate for that because that's really great. On the other end of the spectrum would be private equity-owned ones where it's very controlled and very choreographed. and you have to really keep your antennas up to figure out what's true and what's not true and what are the real numbers and so forth.

26:48And in between that, I would put corporate companies. We've done very well with the carve-outs, corporate carve-outs. That works well. We're looking at some in this industry as well. But even buying whole public companies has worked out well for us, too. We just announced one with RxO a couple days. Well, actually, it wasn't a public company. It was a division of a public company. It was a carve-out. It was Coyote from U.S. Right, and the stock, the investors really liked that deal. Up 20-something percent. Why buy an existing company as your sort of vehicle at all? Like, why not start from scratch and do an IPO?

27:19Is it just speed or start private? Yeah. I did the same exact thing with XPO. If you remember back in 2011, there was a trucking company called, it was a brokerage company called Express One, which is where XPO comes from, Express One. It was trading on what was then called the Amex, American Stock Exchange that NYSE bought. And we did a pipe. We did a pipe into the company, took control of the board, moved to the headquarters of Greenwich, and off to the races. We kept buying more companies. I did the same thing here. I found a public company. We did a pipe into the company, and we're continuing to grow the company after that.

27:55Familiar territory for me. So repeat. Going back to building products. So there's a lot, as you mentioned, that's getting built because there's housing, there's infrastructure, there's all the energy stuff, there's all the data centers that are getting Energy is not the strongest of them. Okay, but there's all the data. Data centers are huge. Electricity is huge, yeah. Are they competing with each other, like, for some of the same supplies? So, like, to what degree is the supply chain in tension? No, they're fairly segregated. So, electrical is a whole different than plumbing and HVAC and lumber, in your case.

28:31They're fairly different. Are you going to be in the data? Is there anything that will come through your warehouses or distribution centers that may go to data centers? I would love to have exposure to data centers. I'm very bullish long-term about the demand for data centers. The AI growth needs data centers. A lot of them, a lot of power. So yeah, I think that's a growth area. You mentioned distribution for commercial real estate earlier. And I'm curious, are there additional considerations for commercial versus something like residential or infrastructure? And one of the reasons I ask is because we were speaking with, I think it was the CEO of Tractor Supply, Hal Lawton.

29:09And he was talking about how expensive it is to build out these big stores nowadays. And he was talking about ways to save money in that space. And I think I jokingly said to him, like, well, you know, you run a distribution company, essentially. You bring goods into the store and then you sell them. Couldn't you become your own supplier and distributor for construction materials? And he was like, yeah, that's something we're looking at. Would you expect to see more big commercial companies like a Walmart, for instance, or a tractor supply, start to be their own suppliers and distributors for construction materials?

29:44They have the scale already. Yeah. Both those are good customers of the XPO family. I think the Waltons are invested in the new company as well, right? No comment. That was Bloomberg speculation, but that wasn't from us. So I think sometimes it's not through distributors. Sometimes if you have these big purchasers, they go direct. Yeah. Right, direct. And that's fine. That's like in most industries, the ones that have the massive size, massive procurement, they tend to go direct. But that's an exception, not the rule. That's a few at the top. Question from the audience that's good. By the way, I think there's a way to, Tracy mentioned there's a way to, there's the QR code if you want to enter in a question.

30:24There is others, as you mentioned, there's others in the space, in the building's products industry. Others are trying and presumably seeing the same thing of consolidating this hyper-fragmented space. How do you think about competition for deals and how do you balance that competition while not avoiding the winner's curse or overpaying for a company? We don't overpay. We don't underpay. We don't try to steal a company or take advantage of anything like that. We pay a fair price. Fair price. We don't pay these trophy prices. So sometimes you see in many industries, companies, they're not really professional M &A machines.

31:02They're once in a while, do a big deal. And they overpay. And when you overpay, it takes years and years and years to get your cost. It doesn't work. In terms of creating shareholder value, if your focus is on shareholder value creation, then you need to pay a reasonable price in order to get good returns on that. Competition for M &A is normal. I mean, in every industry I've been in, I haven't had a monopoly on being a consolidator. I'm going to ask a very cliched question, but I think it might be illuminating in the sense of what you look for in an acquisition. But is there a particular deal that you're most proud of?

31:41Well, it's like asking, who's your favorite kid? You can't answer that. I still get Christmas cards from most of the people I want. Yeah, there are. I would say two deals. It's hard to pick which ones. So in 2015 at XPO, we did two deals. We did Conway, which got us into LTL. And now we're an LTL behemoth. And the other one was Norbert Dantrechang, which was a French company that did contract logistics and trucking and brokerage and LTL and different parts of that company we put with the different spins. And both of those were really good. And both of those were really good because they gave us scale and they gave us an opportunity to apply our playbook to those businesses and dramatically improve the profitability and the return on capital on both of them.

32:29So from a point of view of shareholder value creation, those were very remarkable deals. So I would pick those two. Why don't you tell us more about that Conway deal? So less than truckload, carrier. When you say we applied our playbook, because that's what we're trying to understand further. What did you do? Conway came into the house and what did you do with it? First thing we did is we looked at the organization chart and figured out. And when you have an organization chart, I've looked at a lot of organization charts, it should be real elegant. It should be simple and geometric and just really simple, simple and straightforward.

33:04Their organization chart was spaghetti thrown at a painting. You know, there's some artists who you look at the painting and you say, I don't know, it kind of looks like you just took a bunch of mud, put it in paint, threw it on the canvas. That's what their org chart looked like. It was very unsatisfying to look at it. And there is a correlation between the beauty of it, elegance of it, and the effectiveness of it. It's a very interesting concept. Theirs wasn't. And they had multiple. It was a business that had grown up Kluge style. K-L-U-G-E meaning. They bought some stuff and they never really integrated it thoroughly.

33:37You know, to do integration, you need courage. You need confidence. You need to know that what you're doing is the right thing. They were more sheepish about that. So they had three IT organizations. They had three HR organizations. They said, the three finance accounting lawyers, the three of everything. And you don't need three of everything. That's two extra than you really need. So we went in there and we did an exercise that we do all the time as part of continuous improvement, which is look at everything that we're spending and look at everyone who's on the payroll and think, how are they contributing to achieving our goals?

34:10And are they must-have costs, must-have people? Are they kind of nice to have, but it's not really critical? or are they like, how the heck did this get an organization? You find a lot of that kind of stuff, particularly in bigger companies where things just kind of grew and no one got rid of it, but it's served its purpose and it's not doing much more. So we went through the whole organization and made it streamlined and more effective. And then in the last few years, we got our service levels up really, really high. And as a result of that, we're able to get yield growth and we're able to take market share as a result of that.

34:47A good question from the audience. They ask, what's the biggest challenge of breaking into the building products supply chain? I guess another way of asking that is what's stopping you from making$1 billion of revenue right now, as opposed to the end of the year? Give me a little time. We've been in the business like 10 seconds, but we'll get there. I'll satisfy you on that goal. So the biggest obstacle to achieving big goals, personally too, by the personally and professionally, are people. The people that you associate with, people you surround yourself with, people you deal with all day long, the people whose exhales you inhale and vice versa.

35:26That's the key thing. If you can get fantastic people, smart, honest, hardworking people who get along with each other and get the right culture of how you interact with each other, you can accomplish enormous things. You can dream big and actually achieve it. If you don't have that, if even, and you have to have it universally. You can't just have, like your top 25 people, you can't have like 15 are hardworking, but 10, you know, maybe they work, maybe they don't work. You can have like 15 honest ones and 10 are dishonest. It has to be all in this example, 25 out of 25, 100%. If you can concentrate on the quality of the people and the rules of engagement between that constellation of people, you can move mountains.

36:08I think there might be someone in the audience who also is planning a roll-up because they want to know what was your number two? What almost made the cut? The 50 industries you looked at, what didn't happen? And so therefore, there's an opportunity for someone else. So my absolute favorite one, apart from this, was oil and gas. So E &P oil and gas. So I used to be in the oil business a long time ago. And right now, right now, you can go out and you can buy producing properties for three times cash flow. And then you have an annuity for like 15 years are just getting and that's right today these right right these prices exist right this minute however you can't finance it you just can't finance it i went to 17 sovereign wealth funds and long only funds that have historically financed xpo in the past and said went over like the things i was looking at i said what do you think of energy every single one said no no no don't do energy we can't do that it's esg or they got burnt during the boom or for whatever reason it was just like they're sellers, not buyers.

37:08Well, that makes low prices when there's not a lot of buyers. Now, similar phenomena you see in Europe, sort of. I mean, the analogy breaks down at a certain point. But in Europe right now, in building products distribution, very few buyers. Very few buyers. I can't think of one big strategic that's doing a roll-up in Europe. And the private equity firms is just a handful of them. Whereas here in the United States, there's a couple dozen of them who are active. Would you ever do renewables? I mean, since you brought it. renewables. Since you brought up the financing point, I mean, I don't think people are falling over themselves to finance renewables necessarily, but you don't necessarily have the mandate constrictions.

37:48Is that something you see any value in? I think green, renewable, this is all sustainability. These are long-term real trends. This is the future. It's not just a story. And I think any company that wants to succeed and prosper needs to be thinking about, am I leaving the world in a better place? So I think every company, not just our company, not just our industry needs to be thinking about all those things. Another question about global supply chains. And obviously we hear a lot about friend shoring or companies feeling that they have to reduce their exposure to China because reasons or whatever.

38:26How are those trends going to play out within the context of building supplies? What are you seeing in terms of geopolitical risk hedging, maybe is the way to put it, and the sort of changing geography of supply chains within building supply? Well, China is certainly a risk because the relationship between China and the West is probably an all-time low. So it's a very difficult time. So diversifying your supply chain away from China is probably not a bad idea. Now, in our case, we have a very clear perimeter that we're going after. We're going after North America primarily. When I say North America, I mean USA and a little bit of Canada, most of USA, not so much Mexico, and Western Europe, so France, Germany, Spain, so forth.

39:11That's really our perimeter, and that's about$800 billion between those two. But there must be products that you expect to come through your distribution center, or sorts from all over the world. There'll be some sorts from China, but you don't want to have a preponderance of your supply chain coming from China. That's highly risky. Is that different to how you would have maybe done this kind of business previously? Like that newfound supply chain resiliency is at the back. Absolutely. I mean, I gave the keynote at a big trade event out in California about, I don't know, eight or nine years ago.

39:41And the topic was globalism. I was a big champion for thinking globally, but the world's changed a lot in the last decade. Yeah, you don't hear that much anymore. No, you don't. I have a question that I thought of earlier, and I don't want to forget to ask it. It's about warehouse tech. And we did this episode. It was actually about the snack food industry and why there are so many proliferations of snacks like, you know, Korean prawn flavored Doritos and stuff like that. And the guy was saying that one of the technological breakthroughs is that with the robots and the warehouses, they can get a lot more skews within a given amount of square footage because they can pack the warehouses in different ways and have the robots go around and stuff like that.

40:18What do you see on that? Like in your over your years of dealing with warehouses, do you are you able to get is that the same in the various industries you work with that a given amount of square footage can have a greater diversity of goods these days due to automation? A warehouse managed well can be far more productive and efficient than one that's like a hardware store. So slotting, for example, S-L-O-T-T-I-N-G means you use the data to analyze which SKUs tend to go out together. And you position those in the warehouse. You locate them next to each other. So you save a lot of time, for example.

40:56And everything, so warehouse should be less, warehouse of the future is less and less people. And more and more collaborative robots and automation. If you go to some of the more advanced GXO warehouses and you look around, you go, hey, where's the people? It's very quiet here. Very efficient and very, very effective, what it does. That's the future, for sure. This is a question from the audience, but they're asking, because the industry is so fragmented and often, you know, very regional, is there part of the country that you're more focused on, at least initially? No. National, we want to be national and we want to be global.

41:32But global in the sense of Western Europe and North America. We're not really pursuing the other parts of the world. But like people talk, for example, about, you know, this great business migration to the southeast, to the southwest, et cetera. But that's not at the level of it. There's a lot of – the growth rate for construction is certainly bigger down south. Here's something else I always wanted to ask a roll-upper to use my previous term. What weird should she use? M &A professional. Serial entrepreneur. Billionaire, I suppose, would work. Don't call me a billionaire. But M &A professional.

42:03I like that. Okay, M &A professional. Thank you. But, okay, we know that you want to buy a bunch of companies. Does the sequence that you buy them in matter? Like, is the idea, okay, I buy this one, I buy that one, and then I put them together, and I get to that level, and then I do this and that? Or is it just like, we have all these targets, let's just try to complete as many deals as we can? In the perfect world, which doesn't exist, yes, the sequence would be deliberate, and you'd have lots of synergy between number one and number two and number three. In the real world, that should be some level of opportunism.

42:33and seeing what's out there and what's actionable, what's a good value. Since we're at a conference and it's the year 2024, I have to ask an AI question. Great. And I'm sure, you know, everyone's doing something with AI, et cetera, and I'm sure it's all great and efficient. But what specifically, what does that mean? And when it's at this company or some of the other XOs, what does it mean to you to put like AI into practice? And are there any specific areas where you can say, look, this is a tech that I want to call artificial intelligence, and it's either improved the product or significantly saved on cost?

43:12So XPO was all about machine learning and AI. When I first hired Mario Harik for my CIO, he's now CEO, but when he was CIO, the vision was, here's all these brokers, and they have these halls with hundreds of kids, and they're on two phones at a time. And we said, why do you need these people? This is stuff that should be done on an app. The shipper would prefer to be better for the shipper to be doing on an app. It would be better for the dispatcher and the trucker to be doing an app. And why are you paying a third of your gross margin to sales reps? You know, not adding, in some cases, enough value to justify that.

43:48And at that time, 0 % of the business was automated. Today, RxO, the one that just bought Coyote from UPS, RxO is where we put the brokerage spin. 97 % of the orders are either sourced or covered digitally. And I believe that is the main reason, not the only reason, but it's the main reason why RxO has been growing at three times the industry growth rate because the model works better. Are there specific pieces of technology or technology platforms that you can pull out of XPO or GXO and use for QXO? Like do you use, for instance, like those trackable pallets. Those are very cool. I find, could you use something like that for distribution?

44:30So there's tons of stuff we could do with, with the XOs. We got to be a little careful about that. It has to all be arm's length and so forth. But, but yeah, there's tons of things that we could use from the XOs that you got to remember this business has a big component of transportation logistics. This is a business where you're transporting building materials from the OEM for the manufacturer by truck, mostly a little intermodal, but mostly truck, to the warehouse that you're managing, we were talking about before, and then you're delivering it in the last mile generally to the job site, almost always by truck.

45:05So there's a big cost and a big efficiency and productivity and ability to delight or annoy the customer by getting transportation logistics just right. Someone asked, and perfect dovetails with your answer there, how far up and down the supply chain do you go to ease bottlenecks? When you think, I mean, supply chain risk, I know supply chain professionals, this is what they've always done. But for the rest of us, supply chain risk is this new thing that most of us started talking about in the last three or four years. And I have to imagine it's going to stay on the minds of many business managers, particularly with the China risk and so forth.

45:41Talk to us about some of what you will do with QXO to hedge against that or protect against supply chain risk. And how close do you want to get to the producer? How close do you want to get to the end customer to ease those concerns? I want to get very close. We want to buy directly from the manufacturer. We want to sell directly to either the final end user or the contractor that's servicing more often, not so much the C, more the B that's serving the C, the business that's serving the consumer. So yeah, you want to be close. That's the whole business. How do you do it? The business plan is to buy in large quantities at a price that reflects, at a lower price that reflects those larger quantities and the risks you're taking by storing them and putting them in inventory and selling them retail in smaller amounts at a price that is appropriate for retail.

46:30And that's your margin. That's how you make your business. But the supply chains, yeah, we, but you can't blame the manufacturer. You can't blame anybody on the supply chain, but ourselves. If we're a distributor, that's our responsibility. Our responsibility is to get the supply chain right, to use technology and to use culture, to use compensation and recognition, to get people to take that seriously so that we always have the right amount of products in stock. So when customers want a product, we got it. And that when a customer needs it by a certain date, yes, we can do that. And if we do that, if a distributor does that professionally, I believe you'll get a little more price, not a huge amount more price, but you get a little bit more price and you'll get greater share of wallet.

47:15That's my thesis. I need treated plywood by this weekend, Brad. I know a guy. This is bad. Okay. There's one more question from the audience. And before I ask this one, I'm just going to give a plug to Brad's book because it's all about his experience as an M &A professional. But it is one of the more unusual sort of entrepreneurial books that I've read because you do have some unusual strategies in the way you think about business. So I remember there's a chapter where you talk about thought experiments to make you think in new ways. And one of the thought experiments was imagine yourself as a banana.

47:51That one sticks in my head. I like that one. But you also worked, and this actually led to another All Thoughts episode, but you've also worked with an ex-CIA official who was very instrumental in the use of lie detectors as someone to help you do due diligence on different companies. We did. And he was amazing. It's a good episode, but this brings me to the audience question. They ask, as you've applied various new and improved management techniques to your acquisitions, what are some old techniques that you found have to go or just aren't very useful anymore? So my approach to business, as you can tell from reading the book, is really simple.

48:31It's very straightforward. You get great people. You figure out big goals with great specificity and clarity. What are you trying to achieve? But bold. We're going to create a$50 billion company. I've got everyone in the organization completely signed up for that. And then you figure out, what do I have to do to get from here to get to there? What are the steps I have to do? And then who's going to be in charge of that? And then how do we tie compensation to that? And how do we measure it, keep people accountable accurately, and appropriately and fairly reward people for achievement on that and keep people on track?

49:09That's my basic playbook. There's a lot of other details to it. That's my basic playbook. Great people, big vision, hold people accountable, and go make it happen. And as a result of that, you create, in all likelihood, great shareholder value. The book's been out for several months. Has anyone – and it's called How to Make a Billion Dollars, right? A few billion dollars. How to make a few billion dollars. I don't short-taise. So sometimes Tracy and I, because we've been doing the podcast for several years, like we'll get a email. It's like, by the way, I just want to say I listened to this episode.

49:39And then I went to business school and now I got my first job on Wall Street. We've been doing it for a while. Has anyone called you up and say, Brad, I just want to thank you. I've made a billion dollars since buying your book. Or a few billion dollars. A few billion. Not yet. But I underline the word yet. But I tell you what I have had. I've had a lot of people like what Tracy thought experiments. I have imagined myself as a banana. It's true. No, it's because the commonality of DNA between a banana and a human is quite significant. It's like 90-something percent. It is more than you would expect.

50:06I'll say that. Brad, there's another question I want to ask you, which is, you know, you're an M &A professional, a serial entrepreneur. You start one company that's very successful, then another that's very successful, and now another. How much runway do you give yourself for each company? And when do you declare like, okay, I've done it here and now I'm going to move on to the new thing or now I feel prepared to take an additional thing on? If you look at my bio, it's basically every decade. I really get into something. I started from scratch. This big idea, get everyone. We do it, do it, do it, do it.

50:40And 10 years later, we did it. And I do it again. That's my cycle. Everyone's got their biorhythm. That's mine. Once a decade. Well, we'll have you back here in a decade and you can tell us about your next venture. Great. It'll have XO in it. Sounds good. Brad Jacobs, QXO. Thank you so much for coming on OddLots.

51:17That was our conversation with Brad Jacobs at Bloomberg Invest. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wiesenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. And for more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter. And if you want to chat with fellow listeners, go check out our Discord. discord.gg slash oddlots. And by the way, sometimes we drop special invites to events such as this one only for Discord listeners.

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