So if you go back to Brad at that point in time, what would you have done differently?
I wouldn't have bet the ranch on it. Well, we didn't bet the whole ranch. We probably lost 500 million bucks. So it's a lot of money, and you remember that forever. So we could afford it, but barely!
From Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out-of-consensus calls, one that was on the money and one that wasn't. Today on the show: Brad Jacobs, chairman and CEO of QXO, in conversation with Eli Gross, Global Co-Head of Investment Banking at Morgan Stanley. Brad Jacobs is the founder of eight separate billion- and even multibillion-dollar companies. Those include United Rentals and XPO, the sixth- and seventh-best-performing stocks in the Fortune 500 in the last decade. He's also author of two bestselling books, "How to Make a Few Billion Dollars" and "How to Make a Few More Billion Dollars."
Brad, great to have you here.
So Hard Lessons is about out-of-consensus calls in investing. And it's hard to think of anybody that's made more calls in investing than you: 500 M&A deals, multiple billions of dollars of capital, as you've built up United Rentals, United Waste, as we met each other, XPO in transpo and logistics, and now QXO. So we're going to get into it. We're going to talk about out-of-consensus calls that you've made.
I've made a lot of out-of-consensus calls.
I've been around a few of those.
Yeah, you helped me on a couple!
So let's start with an out-of-consensus call that you made and it actually worked out.
First thing that pops right in my head is one that you advised me on when you were a transportation banker: Con-way, of course. So that was—when was that? That was... 2015! 2015, about 11 years ago. And we were looking at—as you recall—we were looking at Menlo. They had a subsidiary that did contract logistics. Great, great, great little subsidiary. And I wanted it. I wanted it real bad. It had these really blue-chip customers, and I wanted to cross-sell into those customers. So we were talking, trying to get a deal done, and we were going to do this Reverse Morris Trust. And then the market cap went up and it didn't work anymore. And the Con-way folks said, "Why don't you look at buying the whole company?" Wow. That's an interesting idea. I had never really thought about buying an LTL trucking company. We were a non-asset company at that—we were a brokerage, for the most part. I said I'll take a look at it, keep an open mind. And we looked at it and studied it and said, "Wow, there's a lot of cost we can take out of this," because they had done three big acquisitions and never integrated them. So they had three HR departments, three IT departments, three sales organizations, three of everything! So, you know, we didn't need all three. We just needed one. I saw an opportunity to improve the quality of the service up, and all that panned out. But at the time, very skeptical reaction, as you remember, from Wall Street. Our stock had gone from—I don't remember the exact numbers—from something like 50 or 60 or 70, down to like 20 or 30. Really, really dramatically down. And I remember calling you, actually, and saying, "Well, what do you make of all this—" "Look, it depends what you think in the short term or long term. Short term, you have to tough it out, because you have a bad reaction here. People don't really understand the story yet. It's going to take some time. It's a pivot. It was bold. It was a good move, but it was a pivot. And investors don't like strategy shift. You have to accept that. But long term, if you execute on what you plan on doing and you deliver the numbers, investors will love it!" And it turned out they did love it, because we doubled the EBIT in two years.
But walk us through that, because I remember having that conversation. It was a Sunday. You gave me a call and said, "What do you think about this?" I gave you my initial reaction: it's a pivot. You knew it was going to be a pivot. Turned out to be a home run. But as you thought about communicating that pivot to your investors, to the research community, to your employees and customers, how did you think about having those conversations?
Well, I didn't think the reaction was going to be as bad as it was. I was expecting people to give us the benefit of the doubt, that we'd actually done a lot of diligence. We owned a big percentage of the company. Obviously, we weren't going to do something that was going to hurt the company. But investors at that moment in time were very short-term oriented, and they were thinking about, like, this quarter and right away. And I was thinking about five years and 10 years and building a durable company that was going to work and, you know, be amazing over time. So there was a disconnect there.
And would you say that you have unique ability to do a pivot like that because of the success that you built up over time? Or do you think, no, even at the beginning of my career, if I had conviction around the long-term strategy, I would just go do it and damn the torpedoes, we're going to go make that investment.
I don't feel I have unique anything. And I don't have a unique ability at all to do something that's impossible. But I think earlier in my career, it was more challenging because I hadn't proven myself yet. Now I think I get a little more benefit of the doubt, because we've done a lot of out-of-consensus hard calls, and it worked out. They all worked out really, really well. So I think people give me a little more slack. On that particular deal, the board was very skeptical about the deal. So was my fellow management team, for the most part. But I felt really strong about this, because I really was in the weeds on the diligence. I understood exactly what we were going to do in order to dramatically improve the profitability of the business. So I had conviction about it. So I stood up to the board and I rallied my team around me. And, you know, at first it was difficult for a few months. But after a few months, the stock doubled and tripled. Today, of course, it's many, many times what it was then. So it was okay. But I remember being interviewed by The Wall Street Journal. The stock had come down a lot. And I told the reporter, "I think this is going to be the best deal of my career so far." Now we've done better ones since then, but it turned out I was right. So we bought Con-way. You might remember this. The OR, the operating ratio, was 96%,
So they were making a 4% profit margin. Today, Mario and the team who are running it now—I'm not running it—they've got a shot at getting into the 70s.
Did you see that at the time of the investment?
Well, Con-way's growth—the LTL business growth—really took place in two sections. The first few years was just organizing the organization chart. There was just too much of everything and multiple of the same thing. So getting it lean. Getting it so it's a machine that functions, and you don't have bureaucracy. And you can actually talk to people doing things rather than people who are hearing things. I mean, really, it was elegant, getting the org chart very elegant. It was mainly to make it effective as an organization that can communicate with itself in efficient ways. And then, once we got that sorted out, then it became LTL 2.0, which was to improve the quality of service. And we said, "Okay, that's what we got to do! We’ve got to get our on-time delivery up and we got to get our damages down." So that took a period of a number of years.
When you look at investment opportunities, how often is it for you it's an undermanaged situation versus, as part of your businesses, synergies just being better? Is it 50/50? Or how would you mix it?
I would say only about 20%, 25% are fixer-uppers. There's been great value created from those fixer-uppers after you fix them up. But that hasn't been the rule. The rule has been: they've been good companies, but we made them better companies, and we brought synergies. So I was with someone yesterday who's a very big investor, and they were telling me their definition of synergy is one plus one equals 11. I like that. That's a good one: one plus one equals 11. And the ones that really worked the best were ones that we put the companies together, and there were both cost and revenue synergies. We were able to eliminate duplicative SG&A and redundant positions and so forth. That's kind of a one-trick pony. It's not the gift that keeps giving. The gift that keeps giving is the synergy on the top line, where you can cross-sell services, where you can merge the salesforce, give the salesforce more things to sell, where you can find best practices from the company you bought and best practices that we have. Take the best of both, and now you've got a whole new set of best practices that are better than the previous one. Those are the ones that are really the best ones.
When people read your book, I think a lot of people have the reaction, saying, "Wow! It seems so easy! You identify an industry, I find companies, I acquire them, I get synergies, and I create all this value." Easier said than done. The one thing that I noticed, as your advisor on a handful of deals and sometimes being on the other side, is that the study of the industry and the opportunity set is very deep. The preparedness to act on opportunities is quick. And the speed with which you integrate is phenomenally fast. Is that the secret sauce?
I don't know if it's a secret because I wrote two books about it, but it's the sauce! I mean, the sauce is to know what you're getting into. What are you going to do with this company? How did it get to where it is now? What had to happen in order to get here? What did they do to get the numbers? How much of that is sustainable? How much of that is just one-trick pony stuff? And what can we do to the company now to turbocharge its growth? How can it grow more? How can you get price? How can you get volume? How can you please the customer more? How can you really figure out exactly what the customer wants and then give it to the customer so that you get a bigger share of their spend, maybe get a little bit more in price and you get higher organic revenue growth. That's what really makes them hum.
You know, having been by your side on lots of transactions, the one thing that I recall vividly is your focus on meeting the people who are running the organizations you're buying.
It's not necessarily 100 people. It's the key people at a very deep level. What do you look for when you're having those conversations with the owners or the business leaders?
I absolutely do like to meet with the top 15 or so people at a minimum for an hour and a half, two hours apiece, but as long as possible. And I just want to ask them truthfully, "Would you pay billions of dollars for this company if it was your billions of dollars?" and see how they react to that. And it's amazing what people will say. Sometimes people think about it for a while. They go, "I guess so." That’s not a good answer. That’s not a good answer.
You want some more conviction.
A lot more conviction than that. I want to hear why. Give me detail. I want to hear what's working in this company that if you were to buy it, we should continue doing it because it works really, really well. What's going on in the company that you disagree with, that you think we could do something in a different way and have a better result? And hear what they say about that, and then see what patterns emerge, what themes emerge from all the different people we speak with separately. I do Zooms almost every day with small groups, five, 10 people from the company, and that's where I learn the most. People relax and tell you what's really on their mind. I find so many times, Eli, because some people have been working in a company for 10, 20, 30 years—nobody's ever asked them, what's your idea to improve the company?
