How to pick an industry and price an acquisition

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 58:14

   How do you think about it at a high level? and then specifically walk me through your process for not only evaluating companies, but beginning to end, including integration. M&A has been a big part of my business career, not in the first 10 years. In the first 10 years from 1979 to 1989, I was in the oil business. It was all organic. We didn't do one single acquisition. It was all just trading and brokering and building up a business organically.

2. 58:41

   But since 1989, I've been doing roughly about 500 acquisitions. I've done a lot of M&A. I love M&A. I love M&A as a way to create value for shareholders because I don't know of another way on a risk-adjusted basis, on a certainty level, that is more likely to create massive shareholder value than doing sensible M&A. In order to understand how to create value, I have to understand how am I going to scale up the business?

3. 59:14

   I only know how to create tremendous shareholder value by growing a business tremendously. That's how I know how to do it. And of course, it's organic. And I've had very good organic growth. The companies I've led have been well-performing companies that have had good market share and growing market share. And we've taken customers away. We've taken business away from our competitors who aren't managed as well.

4. 59:38

   But the real, when you look at the numbers, the real growth has been through M&A, through acquisitions. What's been my secrets on acquisitions? I'll try to be concise because I did an hour and a half podcast with McKinsey a couple of years ago with Andy West. That was the only question. He asked one question and I babbled on for an hour and a half. It's still a big, people still watch that podcast because I really told everything about it.

5. 1:00:00

   Here's the gist. The gist is, you first have to select an industry. You can't just do M&A. So I spent the last year going around studying dozens of industries, looking at hundreds and hundreds of acquisition opportunities, mostly with Goldman Sachs, Morgan Stanley, and some other friends, Sequoia, and some friends, figuring out, could I apply my playbook to this industry? Is the industry big enough?

6. 1:00:26

   Is the industry fragmented enough? Is there M&A to do? is bigger better? That's not always the case. Are the economies of scale? Do you have a competitive advantage by being bigger? Is there a way to apply technology? My companies have always been tech forward to the industry because the industry is a little sleepy on technology. Is the way I run a business, the way I do the intake of people and the culture and the way we interact with each other and so forth, is that something that'll work in this industry? Is it something related to something I know about. Industrial services, for example. Most of my companies since 1989 have been industrial services. And I looked at many, many different industries, and I settled on the one that checked every single box, which was building products distribution. And the name of

7. 1:01:09

   my company is going to be QXO. And M&A will be a big, big component of what we do. There are $800 billion of distributors in Western Europe and in North America, which is where I want to plant my flag. I want to build a company that's called $50 billion. I can do that. If there's an $800 billion size, I can take 6% of that through acquisition and through organic growth. I can get to $50 billion. There's many other industries that are nice, but I'm not going to be able to get to $50 billion. I want to get to $50 billion. So this industry, there's a clear path of how I can do that. Now, I can't just buy, and there's roughly about 7,000 distributors here in the United States. There's about almost twice that amount in Western Europe. So it's roughly about 20,000 distributors. You've got to be very careful about who you buy. There has to be a

8. 1:02:02

   reason why you're buying that company. There has to be a strategic, a compelling strategic reason of why you're buying that company. What makes sense for that? Why is that good for customers? Why is that going to make our business a better business? Why does that fit with the other things that we've already bought and put together? How's it going to integrate well? I like to look at the multiples that I pay for an acquisition.

9. 1:02:24

   The price that I pay for an acquisition is very, very important because when I look at the levers of how we create shareholder value, what contributes to that? The biggest lever, the biggest component is the differential between what I raise capital at due to my relationships with mostly institutional investors and because of the track record and what I can deploy that at on doing acquisitions. The second biggest lever is how much can I improve the businesses that I buy? Those are the, there's many, many levers, but those are the two biggest levers. So I pay close when I've studied all these different industries, I've studied historical acquisition multiples. And one of the reasons I like building products distribution is I believe that I'll be able to buy companies at lower multiples of their profit, then I'll be able to

10. 1:03:13

    raise capital at. And that's going to be a big, that disagio, that spread, that difference, that delta is going to create value, boom, just right away, right from the first day. Now, you asked about integration. Integration is extremely important. Anybody can buy a company.