QXO has left many in the industry baffled and astonished with its recent announcement of an investment that will revolutionize the building products industry.
This week, the tech company announced it had signed a purchase agreement with investors for a $3.5 billion private placement, putting it on a path to gain more than $5 billion in buying power and positioning it to acquire a number of large public and private companies.
This investment is reportedly the largest increase in the building materials industry’s history.
Brad Jacobs brings business growth insight to the building products industry at the company. … [+]
The company’s chairman and CEO, Brad Jacobs, previously said he plans to grow QXO into a company with a market capitalization of $50 billion over the next decade.QXO declined to comment beyond the press release, but a person familiar with the investment said investors include several well-known names, including Morgan Stanley Investment Management, Liberty Mutual, Sequoia Heritage and Madrone Capital Partners, as well as longtime XPO shareholders Orbis Investment Management and T. Rowe Price.
While construction has been limited by a variety of issues, QXO is promising disruption and value-add from a number of upcoming acquisitions, along with a healthy injection of technology.
“Brad Jacobs’ track record of building multi-billion-dollar businesses in a short space of time and delivering significant value to shareholders is nearly unparalleled, and I want to emphasize that right away,” said industry expert John Burns, CEO of John Burns Research & Consulting Inc. “The impact on the industry will almost certainly be significant.”
The company’s growth plan is to leverage technology to become an $800 billion building materials distribution leader, which is certainly an ambitious goal.
“QXO’s large investment in the building materials industry is a bold and obvious move,” said Craig Webb, president of construction materials consulting group Webb Analytics LLC. “It’s a bold move because the size of the public offering is unprecedented. But it also makes sense because the U.S. is in a severe construction shortage and the construction process is very disorganized, so any company that finds a way to efficiently serve this market is likely to make a lot of money.”
Currently, building product players and stakeholders believe that success in the industry is down to human factors such as building and maintaining the right relationships, which is why many players are backing away due to an intense fear of change.
“A goal of $1 billion in year one and $5 billion within three years is an audacious goal in any industry,” says Grant Farnsworth, president of building products research firm The Farnswroth Group. “The fact that Jacobs wants to achieve it with building products makes this goal perhaps unprecedented. There’s no doubt Jacobs will have to write a check to buy or earn success. The questions that remain are: does his solution solve an industry problem, is he building a product that doesn’t have a need, is the need big enough to support $5 billion, and how quickly can building products adapt and be adopted?”
Todd Tomarak, principal in the building products advisory division of housing data group Zonda, thinks the timing of QXO’s announcement is ideal.
“The industry is moving through different phases, from unwinding front-loading to pushing back deferrals,” he said. “The last time the industry faced these deferrals, as soon as interest rates stabilized, renovations increased by more than 25% for three consecutive years.”
But he noted that the industry cannot easily handle such large fluctuations, and if companies can deliver products on time and influence labor productivity, they have significant pricing power over competitors. A recent example is how window and door suppliers managed prices in 2021 while struggling to deliver products.
“Change is coming,” Tomarak continued. “The distribution channel is already changing, but given the scale of investments being made, I believe the next five years will look very different than the last 15 years.”
