Builders FirstSource Inc. dramatically increases its digital capabilities, wasting nearly half a billion dollars to recruit an in-house industry software expert.
The Dallas-based building materials distributor – ranked No. 1 on MDM’s list of top building and construction distributors – announced this week that it would pay $450 million in cash to acquire WTS Paradigm LLC, a provider of software solutions and services for the building products industry.
“Purchasing Paradigm is an important step in advancing our digital strategy to create significant efficiencies in construction processes through careful investments in innovative technologies,” said Dave Flitman, President and CEO. from Builders First Source. “Home building is far behind other major industries in adopting modern tools that can save time and money and reduce waste.”
Based in Middleton, Wis., Paradigm “specializes in technology, software development and consulting services that help manufacturers, retailers and homebuilders in the building products industry increase sales, reduce their costs and to become more efficient”.
“Being part of Builders FirstSource will open up new opportunities for our employees, introduce us to new customers, and allow us to accelerate the adoption and deployment of our software to solve our customers’ complex business problems,” said Nathan Herbst, founder and CEO of Paradigm. . “I look forward to working with the Builders FirstSource team to improve home construction through digital tools.”
Builders FirstSource has certainly expanded its customer base over the past few months to justify such an investment in digital scaling. In addition to a few strategic deals in 2021, the company merged last year with BMC Stock Holdings in an all-stock deal valued at $2.5 billion.
The move propelled Builders FirstSource to the top of the list of top building and construction MDM distributors, overtaking former No. 1 ABC Supply Co. It also gave Builders FirstSource the momentum to pursue an equally ambitious in software and technology.
“Our unparalleled scale, industry relationships and technical knowledge uniquely position us to increase adoption of digital solutions within a fragmented customer base,” Flitman said. “Paradigm’s powerful technology platform provides us with an enhanced customer value proposition, helping to fuel long-term growth by establishing a leadership position in digital solutions for homebuilders. »
Nice addition… but how much did BLDR spend?
Wall Street seemed unsure of the deal to begin with. Shares of Builders FirstSource (Nasdaq: BLDR) have remained flat since the company announced the deal on Tuesday. That may be because Paradigm is only expected to generate $50 million in revenue this year, meaning Builders FirstSource paid a 9x multiple for the company.
The high multiple caught the attention of Baird analyst Dave Manthey, whose note to investors dissecting the deal was titled “We like the tech…Not necessarily the label.”
“We see the strategic value of acquiring Paradigm given the significant digital capabilities it immediately brings to BLDR (also prevents competitors from acquiring), although the purchase price is extremely high for industry watchers. ‘distribution industry,” Manthey wrote. “Net, we like the capabilities and possibilities this deal brings, but we don’t like the price. years, not quarters.
Baird outlined what he sees as the strategic rationale for the deal, including the following benefits:
- Deal gives BLDR first-mover technology advantage. “Technology has never been a priority in the single-family home construction/renovation market, but its importance is clearly accelerating. This agreement gives BLDR a first-mover advantage with what they consider to be the best technology in the single-family home market. Baird compared this move to what Watsco did in the HVACR space.
- Share the earning opportunity. Paradigm’s capabilities, including the ability to convert blueprints to 3D renderings, “open up BLDR for potential share gains as the company can efficiently present quotes to homebuilders for floor/roof trusses, Ready-Frame , doors/windows and other products in conjunction with the configuration tool and/or 3D rendering.”
- Margin extension. “We believe Paradigm and digital in general is inherently a more efficient sales process with reduced sales/labor required, allowing BLDR to leverage growth more effectively.”
- defensive movement. “BLDR views Paradigm as the undisputed technology leader in the single-family space. We believe there was likely significant interest in acquiring Paradigm from BLDR’s direct competitors and other strategic/financial industry players building products.
These benefits make sense based on Builders FirstSource’s strategic rationale for the deal. The company explained its reason for adding Paradigm: “In the residential construction industry, digital trends are accelerating and customers want additional solutions that improve process efficiency in complex residential construction projects. the efficiency of construction processes is a great opportunity for digital technologies.”
Added Craig Webb of Webb Analytics LLC: “Builders FirstSource’s willingness to pay 9 times WTS Paradigm’s expected revenue for 2021 shows how strongly BFS is betting on manufacturing, technology and services. Paradigm was built largely by creating ERP systems for window and door manufacturers, two businesses that require mass customization. It now offers a suite of products that enable end-to-end communications from the home seller through the designer and distributor (via virtual home take-off and design software, for example) to the manufacturer and back down the chain. . This connectivity, combined with what’s in each tool, will make all parts of the process more agile and efficient. »
Beyond that, what does this deal mean for Builders FirstSource’s traditional acquisition appetite going forward? Is the company pausing its M&A activity and giving Paradigm time to grow to match its massive footprint? Or does the distributor continue to seek strategic agreements and strengthen its lead among the best distributors?
Stay tuned to this space for more news and analysis on the moves of Builders FirstSource – and mergers and acquisitions in wholesale distribution.
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