Builders FirstSource Inc. is dramatically increasing its digital capabilities, losing nearly half a billion dollars to bring in an in-house industry software expert.
The Dallas-based building materials distributor – ranked No.1 on the list of top MDM distributors for building and construction – announced this week that it will pay $ 450 million in cash to acquire WTS Paradigm LLC, a provider of software solutions and services for the construction products industry.
“The purchase of Paradigm is an important step in advancing our digital strategy to create significant efficiencies in construction processes through prudent investments in innovative technologies,” said Dave Flitman, President and CEO from the management of Builders FirstSource. “Homebuilding lags behind other major industries in adopting modern tools that can save time and money and reduce waste. “
Headquartered in Middleton, Wisconsin, Paradigm “specializes in technology, software development and consulting services that help manufacturers, retailers and home builders in the construction products industry increase sales, reduce their costs and become more efficient ”.
“Becoming a member 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 with digital tools. “
Builders FirstSource has certainly expanded its customer base in recent months to justify such an investment in digital scaling. In addition to a few strategic deals in 2021, the company merged with BMC Stock Holdings last year in an all-equity transaction worth $ 2.5 billion.
The move propelled Builders FirstSource to the top of the list of best MDM distributors for building and construction, edging out former number 1 at ABC Supply Co. It also gave Builders FirstSource the momentum to secure a deal. equally ambitious in the area of software and technology.
“Our unmatched scale, industry relationships and technical knowledge uniquely position us to increase adoption of digital solutions across a fragmented customer base,” said Flitman. “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 home builders. “
Nice addition… but how much did BLDR spend?
Wall Street appeared uncertain of the deal to begin. Shares of Builders FirstSource (Nasdaq: BLDR) have been stable since the company announced the deal on Tuesday. Perhaps that’s because Paradigm is only expected to generate $ 50 million in revenue this year, which means Builders FirstSource paid a multiple of 9 times for the company.
The noble multiple caught the eye of Baird analyst Dave Manthey, whose investor note dissecting the deal was titled “We love the tech… not necessarily the tag.”
“We see the strategic value of the Paradigm acquisition 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, ”Manthey wrote. “Net, we like the capabilities and possibilities of this deal, but don’t like the price. Despite our shock sticker, BLDR remains a flagship idea because current conditions remain very favorable and the merits of this transaction will emerge over several years, not over quarters. “
Baird described what he sees as the strategic rationale for the deal, including the following benefits:
- Agreement gives BLDR the technological edge of the first-mover. “Historically, technology has not been a priority in the single-family home construction / renovation market, but the importance is clearly accelerating. This deal gives BLDR a leading edge with what they consider to be the best technology in the single family home market. Baird compared this decision 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 to potential market share gains, as the company can effectively present quotes to home builders for floor / roof trusses,” Ready-Frame, doors / windows and other products in conjunction with the configuration tool and / or 3D rendering.
- Margin expansion. “We believe Paradigm and digital in general are inherently a more efficient sales process with reduced sales / manpower required, allowing BLDR to leverage growth more effectively. “
- Defensive movement. “BLDR considers Paradigm to be the undisputed technology leader in the field of single-family homes. We believe there was likely significant interest in acquiring Paradigm from direct competitors of BLDR and other strategic / financial players in the construction products industry.
These benefits make sense based on Builders FirstSource’s own strategic rationale for the transaction. The company explained why it added Paradigm: “Across the residential construction industry, digital trends are accelerating and customers want additional solutions that improve process efficiency in residential construction projects. complex. Improving the efficiency of construction processes is a great opportunity for digital technologies.
Added Craig Webb from Webb Analytics LLC: “Builders FirstSource’s willingness to pay 9 times WTS Paradigm’s expected revenue for 2021 shows how much BFS is betting on manufacturing, technology, and services. Paradigm was built in large part by building ERP systems for window and door manufacturers, two companies that require mass customization. Now it offers a suite of products that enable end-to-end communications from the home seller through designer and distributor (via virtual home takeoff and design software, for example) to the manufacturer and back down. 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 suspending its M&A activity and giving Paradigm time to adjust to its massive footprint? Or does the distributor continue to seek strategic agreements and strengthen its lead over the best distributors?
Stay tuned to this space for more information and analysis on the moves of Builders FirstSource – and M&A in wholesale distribution.
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