Brad Jacobs and the next big thing

Anyone who has spent any time reading this newsletter knows of my affinity for Brad Jacobs. It is right there in the origin story. Jacobs is an entrepreneur who managed to turn a boring logistics company into a fantastic wealth creator. His hard work is a big part of the reason I have the time to sit around and opine in newsletter form. 

Jacobs has stepped away from day-to-day operations at his company, but he is not riding off into the sunset. He’s got a book called “How to Make a Few Billion Dollars” coming out in January that I was lucky enough to get a chance to read in advance, and I highly recommend it. It is a nice mix of business advice and personal self-help. I think a wide range of readers would enjoy it and benefit from it.

I also had a chance to sit down (virtually) with Brad to talk about his career, and his book. If you are interested, the interview is available here. (Thanks to the Motley Fool for making it available to non-members.) Despite the me part of it, I think it is a good watch.

Brad is also planning his next big thing. I’ve watched half in horror (because XPO is still a large investment) and half in delight as a number of people I respect a lot have shifted their LinkedIn profiles from XPO to Jacobs Private Equity. When we talked, he did not provide me with any inside information on what industry he has on his radar. But we do have progress this week on his path to his next big thing.

On Monday, a small tech consulting firm I’ve never heard of called SilverSun Technologies announced a deal to be acquired/spun out by Jacobs Private Equity. Jacobs is leading a consortium that will invest $1 billion in cash into SilverSun. The plan is for Jacobs and his crew to take over and spin the existing SilverSun business off to shareholders along with a $2.5 million dividend. So, in effect Jacobs is buying the SilverSun listing for $2.5 million and a small sliver of equity in his new venture.

Some quick thoughts:

1. I’m excited about what he is up to. Past performance does not equal future returns. This new plan could bomb and lose shareholders a lot of money. I’m not telling you that you should buy into the new venture. But Jacobs has a solid track record of three different rollups in three different industries that turned out very well for investors. (Hence the title of his book.) I can’t predict the future or guarantee success, but I do like the track record. XPO started out as a $150 million investment which turned into $20 billion in annual sales in a decade. He told me he hopes to get twice as big this time around.

2. I don’t think you should rush in now. I can’t decide if I am actually going to buy any shares of SilverSun. The stock exploded on the news and is now significantly higher than it once was. And significantly higher, best I can tell, than what that tech business is worth. By my math SilverSun holders will get that $2.5 million dividend and about 0.3% of the equity in the new company. SilverSun has about 5.26 million shares outstanding, so the dividend works out to about $0.47 per share. I don’t know what the consulting company spinout is worth but the market only valued it at between $3 and $4 per share prior to Jacobs getting involved. So you are getting maybe $4 worth of business value, $0.47 worth of cash, and a lottery ticket in Jacobs’ new venture for your $9.50 per share stock price as I type. Not the worst deal in the world if you believe in Jacobs, but a lot of work just to get in on the ground floor. And…

3. You don’t need to get in on the ground floor. Jacobs is a builder, and great companies are not built overnight. If this works, getting in on day 200 or even day 500 or even later will end up just fine. And if it doesn’t work, you will have a lot more data to perhaps realize that it is not working if you take the time. There’s also the theoretical risk that the deal falls apart for some reason and you are left holding shares in a software company I’m personally not really excited about. And you won’t have to deal with the headache of the spinoff and a planned reverse stock split. I don’t see any reason to rush.

Full disclosure: I intend to be a shareholder in this new venture eventually. Again, there are no guarantees in life, but I like the track record and I have a deep respect for the CEO. I think we’ll know more about what he is up to, including what industry he is eying, soon. Perhaps as soon as Dec. 11 but we will see. 

His playbook is highlighted in the interview: It will be an industrial sector that is fragmented (lots of M&A opportunity) and where investing in tech can yield superior outcomes. One of the lessons of Jacobs’ career is that incumbents in old-economy industries tend to not want to invest in tech. They do it their way, the way it has always been done. That creates a lot of low hanging fruit for entrants who are willing to apply tech to make operations more efficient. XPO spent $500 million annually on tech, and the automated warehouses and logistics software now make up the core value proposition in spinoffs GXO and RXO. 

But more than anything, I’m excited to see this story play out again. With ups, and downs, and all of the mess in between.

Most business books, including Jacobs’ new book, are mostly looking back on spectacular successes or failures. There are good lessons to be learned from that. But this is different. We don’t know yet what this will be. There is sure to be a lot to be learned from watching it play out in real time. 

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