Tracy Alloway: Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

Joe Weisenthal: And I'm Joe Weisenthal. Joe, we like talking about the old economy on this podcast, right?

Tracy Alloway: I don't even think when people use that term old economy, I think it's kind of unfair.

Joe Weisenthal: It's funny, I was literally about to respond and say that maybe like this whole old economy, new economy distinction is a little unfair. The old economy is still still here. It's not, you know, It's still with us. It's not generative AI, but it's arguably maybe it's even more important. The things that we call the old economy, you know, you couldn't have the new economy without without cooling and heating.

Tracy Alloway: This is exactly what I was going to say because like the old economy, the actual business of making things and moving things, heating and cooling is very much enmeshed with the new economy, which is all about generative AI. And in order to have generative AI, you need data centers, right? And if there's one thing we know about data centers, it's that they consume vast amounts of both building material and electricity. And he yeah, heating and cooling. So, yes, you're absolutely right. We will We will no longer use the slur old economy. We will find some other other word. But yes, we like talking about industries in which physical things get built and then sold at a higher profit at a higher price from which they were built from and how these how these things actually work.

Joe Weisenthal: Yes, indeed. So, we are going to be talking about that today. We also like occasionally talking about deals and it's not every day that we get to talk about a deal that has literally just been announced and is, I think, you know, one of the biggest deals that we've actually seen recently.

Tracy Alloway: That's right. It's a deal talk. Let's do it. Okay. So, we do in fact have the perfect guest. We're going to be speaking with Brad Jacobs. He's been on the show before and he is, of course, the CEO and founder of QXO, which has just announced a huge deal to buy a company called TopBuild in the insulation space. They're paying 17 billion and at the end of this acquisition, they expect to be the second largest publicly traded building products distributor in North America. So, truly a melding of mergers and again, the the old / new economy. Brad, welcome back to Odd Lots. Thanks so much for coming on.

Brad Jacobs: Oh, my pleasure. Great to be here.

Joe Weisenthal: Congrats on the deal. The first question I have to ask is, is it even accurate to call this an acquisition right now because if you're paying 17 billion for TopBuild, looking at QXO's market cap, you guys are at like 17 billion as well. This looks like a merger. This is so big, this basically looks like a merger.

Brad Jacobs: Yeah, a merger. I'll go with merger. Merger's fine. Putting together two great companies and forming an even greater one.

Joe Weisenthal: You know what's funny? I hadn't heard of TopBuild up until, you know, this morning or sorry, yesterday when the news came out they were going to buy it. You know what I was just thinking about? Like America's incredible. Like this company, so it stock now with the premium that's baked in today trading at 484. This was a $43 stock as recently as 2018. America's incredible. Like these companies that sort of fly under most people's radars can just do You don't have to be in the Nvidias of the world to make a lot of money.

Brad Jacobs: Well, I agree with that. You have to have a service or a product that there's demand for. And you've got to give a great customer experience. And if you have those two things, you'll make a lot of money.

Tracy Alloway: All right. So, walk us through the rationale for doing this because again, like huge deal and it seems to have caught a few people off guard. They were expecting you to maybe buy, you know, some smaller companies, keep the roll-up strategy going. But again, this one is very large.

Brad Jacobs: Oh, yeah. So, the acquisition of Beacon following the acquisition of Kodiak, which is followed now by the acquisition of TopBuild, takes us from 11 months ago where we had no building products revenue, let alone EBITDA, to the second largest publicly traded building products distributor in North America with more than 18 billion dollars in combined company revenue and more than 2 billion dollars of combined adjusted EBITDA. It's a big deal. It's a big deal in the industry. It's a big deal in the market as a whole. It's very creative to our earnings, meaning meaningfully creative to our earnings. And when you look at the multiples, that's reasonable multiples. We're paying 14.9 times 2025 EBITDA pre-synergies and about 11.8 times EBITDA post-synergies. And And there's tons of synergies we can get. We're targeting 300 million dollars or so of synergies over the next 5 years.

Joe Weisenthal: Just to zoom out for a little bit, regular listeners, of course, know who Brad is. We've had him on the show several times. But just in case you don't, he is a serial entrepreneur. If there's ever a company and their ticker has XO in the handle, it almost certainly was founded by Brad.

Brad Jacobs: One exception.

Joe Weisenthal: Which one?

Brad Jacobs: ExxonMobil.

Joe Weisenthal: That one. You didn't found that one. You didn't found Exxon.

Brad Jacobs: I wish I had, but no, got away [laughter] from me.

Joe Weisenthal: But it's always these Again, I hate words like real economy and old economy, but we could say physical economy. And it's like warehouses, trucking and freight brokerage and construction equipment rental and garbage stuff. Like anything real and physical, that's what Brad's into. He's founded numerous companies. He also wrote a book. Came out in 2024, How to Make a Few Billion Dollars. And the reason I still have this job today is because I haven't gotten around to reading the book yet. Had I gotten [laughter] around to reading the book yet, I'd probably be a billionaire by now and I would be doing something different. But I'll get around to doing that eventually. One thing that's interesting though to me just learning about TopBuild today in addition to seeing their stock, they had also been a serial acquirer. And in fact, it said like in one of their recent presentations, this has been one of their main strategies. So, why don't you like talk about like who is this company TopBuild? What do they do? Tell us a little bit about this the history and the footprint of this company that you're buying.

Brad Jacobs: TopBuild is the largest installer and distributor of insulation. Yeah. And as you were just saying, that everybody needs insulation. Every every every house needs insulation in the walls. Every office building needs insulation. Everywhere it's It's a needed product and it's it's not going anywhere. It's not going to be disrupted by AI or LLMs. It's just not going to go away. Yeah. So, when we complete the merger, we'll be number one in insulation. We'll be the second biggest in roofing. We'll be number one in waterproofing. And we'll hold number one or number two positions in certain geographies within lumber and building materials. So, we'll have a huge addressable market, several hundred million dollars.

Tracy Alloway: So, I take the point that everyone needs insulation. This is definitely true. But we alluded to this in the intro, data centers in particular need insulation. How much of this deal is the expectation that you're going to be getting a lot of business from the data center build-out as well?

Brad Jacobs: Oh, we will get a lot of business from data centers, but not just on the insulation. Data centers need roofs, too. Data Data centers need waterproofing. Very much so. Data centers often need lumber-related products. So, so data centers are big consumers of building products. Now, TopBuild itself has single-digit percentage exposure to data centers, but it's very fast growing.

Tracy Alloway: Wait, sorry. Say that How much exposure

Brad Jacobs: Single-digit percentage of the revenue. But but it when it comes to growth, it's growing very very fast.

Joe Weisenthal: Okay. So, when we think about the insulation market in general, how much is it residential, how much is it commercial? And is there a lot of overlap or do companies tend to specialize in one or the other?

Brad Jacobs: It's fairly evenly split. They have a little more residential than commercial, but they have both. Okay. and we have that as well, by the way, in our the company the two companies we bought before this, Beacon and Kodiak. We have residential customers. We have commercial customers. We have industrial customers. We have municipal customers. Everybody needs building products. If there's a building, it's made of building products.

Joe Weisenthal: And just to be clear on the nature of the business, they do installation. Like within the the insulation supply chain, where do they sit exactly? Is it Do they manufacture it or is it just distribution and installation? Like what do they do?

Brad Jacobs: They don't manufacture. Okay. It it they buy it. And then they either resell it Okay. at a higher price to to a contractor or they actually install it. They sell it and install it and to various customers.

Tracy Alloway: So, how did TopBuild actually get on your radar? Did you initially approach them? Did they approach you?

Brad Jacobs: Absolutely, we approached them first, yeah.

Tracy Alloway: Okay, so now I'm very curious cuz I know you have a lot of experience in M&A, and you know, a lot of people would describe your business as basically a roll-up for building materials, but I also know from reading your book and by the way, Joe, I'm not yet a billionaire, but I did read the book.

Joe Weisenthal: [laughter]

Tracy Alloway: You have a very a very specialized process uh when you target a company to acquire them, including having a former CIA intelligence officer, one of the guys who I think like worked with lie detect and all that. uh he was on your podcast.

Brad Jacobs: Yeah, yeah. Yes, yes. So, did he uh did he interview all the CEOs and they all went through background checks and that sort of thing? So, so we do background checks, but we spent 2 days in our lawyers' offices here in New York and about 15 members of the senior management team of TopBuild came up, including the CEO and CFO. And yeah, we interviewed each one for like an hour and a half and got to know them and checked out. Everything they said was true.

Joe Weisenthal: I love that. Interview two guys for an hour and a half and say, "Here's $17 billion." Sounds good. No, there's a I'm sure it's a little more complicated than that. What else goes in in the due diligence process? Do you go around and talk to customers?

Brad Jacobs: Oh, yeah. So, talk to us about that. Well, we have a lot of the same customers. We have a lot of same vendors. Big big overlap. So, TopBuild is very well-known company. It's the number one company in its field, so it's pretty easy to check them out. So, we we knew what we were getting before we did those interviews over 2 days, but still you want to talk to the people. You want to find out where are the skeletons and what are the risks and what what are the good things and where's the opportunities and where's the upside and what are some things you can bring to the table, particularly in terms of technology that could turbocharge the growth of the company. So, those in-person meetings are very important. It's not the only part of due diligence. Sure. You do a lot of stuff online. You do a lot of stuff with third-party channel checks, but those in-person meetings with the management team are absolutely crucial. I would never buy a company, any company, without doing management interviews. It's the most important part of due diligence.

Joe Weisenthal: I love a business that's just buying something and finding an opportunity, you know, buying something, assembling it, making it to nice, and then selling it for more. It's old-fashioned. It's honest. I respect it a lot. I'm glad that you mentioned the alphabet soup of different types of enterprise software that a business has. One of the biggest themes, as you know, in the market this year, really maybe over the last 6 months, but definitely in the last year, is this idea that the relationship between businesses and their software vendors is going to change, and the reason for this is AI. And maybe, you know, maybe some businesses that didn't have that expertise in-house, like, maybe we'll build this solution on our own rather than hire, etc. Sitting at said this deal right now, has your in the last year has your relationship with software vendors, does it feel like the leverage is changing thanks to AI, where is maybe you at the negotiating table when you're re-upping negotiation for seats, etc., where you have a little bit more you can cancel deals or get better pricing? Talk to us about what's going on.

Brad Jacobs: Not really. I mean, a lot a lot of our technology is homegrown. We have a lot of people we've hired from Microsoft and from other other big

Joe Weisenthal: not like building your own like payroll software, right?

Brad Jacobs: Well, we we still we still outsource That's what I'm saying. Like, there's like there's a lot of anxiety in the market that all these legacy companies that do something simple like payroll, oh, look at it. You've seen their share prices. I don't need to show them to you. Well, long term, Joe, that's true. Long term, that's true. Okay. But long term, that's true for pretty much every job and every every industry and every company is AI and and robotics and automation is going to disrupt quite a number of jobs. But having said that, the productivity of the economy is going to be so much greater that we can afford to have more free time and still enjoy nice lifestyle. So, I'm not worried about that.

Joe Weisenthal: No, not worried, but I do have an oppor- What I'm saying is like, are you exploit- Like, do you have any opportunities to like are you a beneficiary of these tools?

Brad Jacobs: Change like talk about Yeah. Absolutely. So, so I've been a CEO since 1979. It's the only job I've the only job I've ever had. I've never been more productive, by a long shot, than I am right now. Reason being, we have AI taking notes of all the important meetings around the company. Okay. So, at the end of the day, I can get a dozen readouts of AI-generated summaries of everything that's going on in the company. Stuff that in the old days, before you had the the AI note-taking, either it wouldn't reach to me or it would reach it wouldn't reach me or it would take, you know, two or three months before it got to me. So, so as a CEO now, you know what's going on in the company all over the company right away in real time. And when you have longer meetings, you can the AI will do sentiment analysis, the AI will look at trends. We can do customer surveys, employee surveys using AI that so powerful now. I mean, you can get real good analysis from it. And it's it's hugely powerful. So, you can see where this is going. AI is going to make corporate America far more efficient than it is right now. Everything that's measurable will be measured, analyzed, and then suggesting how to improve it in real time. It's very exciting time to be alive and be in the corporate world.

Tracy Alloway: Just going back to the QXO business. So, I know I keep saying this is a very big deal, and it is, and it immediately vaults you to, as we said, the second largest publicly traded building products distributor in North America. As you get bigger and as you make more of these acqui- acquisitions, you know, fair fairly quickly, you've done like three or four now in a little over a year, I think, or maybe a little less than a year. Do you worry about antitrust at all?

Brad Jacobs: Well, we're not at a point where our market share is so huge that it would have any effect on raising prices to the customer. So, no, I don't worry about that right now.

Joe Weisenthal: What's your advice? You know, like, one of the things that I'm aware of over the last 10, 15 years is the rise of like, I think they're called like search funds or something. You get like some guys like an MBA, maybe at Wharton. They don't know what they want to do. They raise some money for their friends, and they're like, "Oh, we're going to like go buy this local like pool supply company or whatever, HVAC company, and we're going to like six sigma it up, and then we're going to make some money, etc." I think you're probably a god to these people cuz you have the art of buying companies down as practice. Where do you see them go wrong typically? What would be your advice to these types who think, "You know what? I'm going to buy an old-fashioned business and make it run great." What do you Where do you see people go wrong in this?

Brad Jacobs: Most of them go wrong. Most of them go wrong because they're really not operators. They're really just promoters. They're financial guys, and that's fine, but they don't integrate and optimize the businesses. Now, they can still make money on the spread. In other words, you see some of these smaller rollups, they buy a bunch of companies that whether veterinarians or car washes or whatever, and they buy them at single-digit multiples, and then suddenly they're 100 or 200 million dollars of EBITDA, and they say, "Wow, I'm a big company. I should get a double-digit multiple." And oftentimes that works. That's not how we make money. We make money on, yes, buying companies at a lower multiple than we raised capital at, but then integrating them, optimizing them, improving them, making yourself more valuable to the customer, making yourself a real exciting place to work for the employees, making a real good long-term business plan that creates value for everyone in the ecosystem. That's not what these smaller rollups do. These smaller rollups are really simply playing the arbitrage between what they buy on small companies and then aggregating them to get a higher multiple.

Tracy Alloway: All right. Brad, we're going to leave it there, but thank you so much for coming back on Odd Lots to explain the latest deal. Really appreciate it. Oh, wait, I should ask before we let you go. Any hints on the next target? You have roofing, you have water waterproofing, you have insulation. What's next?

Brad Jacobs: Tracy, we don't look at just one thing at a time. That's what we That's our MO in terms of M&A is look at cast a wide net, talk to lots of different acquisition candidates at the same time, move them all forward ahead like a funnel, and see who gets to the finish line. That way you're you're relaxed about it. You don't have a gun to your head about a specific deal. So, it's not like I'm being coy and not telling you the next deal. I don't know. We're looking at lots of different things. We'll see when and which company the stars line up for.

Tracy Alloway: All right. Well, I can tell you in the Northeast a lot of people are looking at wood burners at the moment cuz the cost of heating oil has gone up quite a bit. So, maybe that maybe there's something there. There you go. I'm saying this out of my own self-interest. Okay. Brad Jacobs, thank you so much for coming back on Odd Lots.

Brad Jacobs: My pleasure. Well, bye.