Few business leaders have more experience in M&A than Brad Jacobs. Over more than four decades, he has created several billion-dollar companies, with the three most recent ones built largely through acquisitions: United Rentals, an industrial-equipment rental company; United Waste Systems, involved in garbage collection; and XPO, the company he currently leads. In this episode of the Inside the Strategy Room podcast, Jacobs talks with McKinsey’s M&A practice co-leader Andy West about the lessons he has learned from his deal-making experience. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.
Andy West: You have done almost 500 deals, and you’ve always been a business builder. Do you think these two things are inextricably linked?
Brad Jacobs: I did most of those acquisitions at United Waste and United Rentals, but in the past decade at XPO, we did only 18 acquisitions. M&A is a tool in the tool kit and it’s not the only tool when you define the job as building an integrated company that creates lots of value for the shareholders.
And M&A is more than just buying a company. What’s the compelling strategic rationale for the acquisition? You need the discipline to look at lots of opportunities, consciously select the very best, then negotiate those in a way that creates a win–win deal. Buying a company is signing a document and wiring money—it’s not the hardest thing in the world. The real work starts after you own the business: integrating the companies, harmonizing the cultures, merging the technology and shared services, and getting the customers and employees of the business you acquired to buy into your vision.
Andy West: How does a given strategy or context affect the way you use M&A?
Brad Jacobs: United Waste was a rollup. The strategy was to go into tertiary markets, often in remote locations, and buy all the landfill capacity, then acquire the collection companies hauling waste to those landfills. Once we bought those companies, we were able to pick up the waste much more efficiently. Density and scale are very helpful in the waste business. We selected regions where we could become the big player in terms of landfill and hauling capability. That strategy worked well. We had about a 55 percent CAGR both on earnings and the stock price and we outperformed the S&P 500 by 5.6 times until I sold the company to what is now Waste Management in 1997.
United Rentals was both a rollup and a rollout. What I mean is that people pay attention to the 250 or so acquisitions we did. “Wow, how could you possibly do two or three acquisitions a week?” We had a big team, we were organized, we did everything in a standardized way. But where we really made money was on the rollout, opening hundreds of greenfield locations. We made a much higher ROIC on the rollout than the rollup because the invested capital was much lower. That strategy worked well too, although we only outperformed the S&P 500 by about 2.2 times.
Andy West: What role did you play in all those transactions? Many people will wonder how you could do so many and also do your day job.
Brad Jacobs: The CEO always gets more credit than the CEO deserves. These ventures are the result of many people who are not visible to the outside community. The credit is dispersed among those doing the due diligence, negotiation, integration, technology, the back office, and realigning the sales and marketing territories. There are only two things you have to manage as a CEO and that’s allocation of capital and time. The senior management team’s job is to be in touch with every element of the organization and make sure everyone understands what we are trying to accomplish and their role in achieving that vision. Then you need accountability.
Andy West: In growth-focused M&A, it can be challenging to divorce the deal model from the strategy. Buying an asset only gives you a foothold that you can then invest around organically. How do you manage the discussions with your executive team on what goes into the deal model and how you invest around the assets?
Brad Jacobs: You can’t do M&A in a vacuum. You need a strategy centered around how, as a result of the business plan, you can provide a superior service to customers, so they choose you rather than a competitor. Every decision has to keep that in mind. How will this make us more of a quality leader for the customer? How will it make us more of a service leader? How will it give us more capabilities to offer the customer? How will it give us a superior cost structure so we can charge the same price as competitors, but our margin is higher? The M&A strategy has to match that strategy.
Andy West: Efficient M&A decision making requires alignment on strategy. How did you drive that alignment to get the speed necessary for that volume of transactions?
Brad Jacobs: First, you need to be crystal clear what the strategy is and in visualizing the future in your own mind. The senior management team must know where we’re going. Second, you have to communicate, communicate, communicate, then over-communicate on top of that. You have to communicate through many channels: digitally, live, on Zoom calls, in town halls, in writing. And the communication must be precise. If you have a large organization with thousands of employees, it’s a tall order to get everyone to understand where we’re going and how we’re going to get there.
Andy West: On communication, I always tell clients, “What you decide today will not sink in for others for 18 months, and between now and then you will have to keep saying it.” With M&A, you are so far in front of the strategy that it’s easy to forget what other people don’t know.
Brad Jacobs: I agree with that.
Andy West: Let’s move from volume to value. At XPO, the revenue trajectory went from $175 million to around $13 billion and while you did fewer deals, M&A was a big part of that growth. You went into adjacent markets there. How was this M&A strategy different from the two previous companies?
Brad Jacobs: At XPO, most of our acquisitions were larger. Our biggest one at United Rentals was about $1.2 billion, but most were much smaller. At XPO, we made several acquisitions that were transformative for the company.
Andy West: Did that change the way you thought about the deals from a diligence and evaluation perspective?
Brad Jacobs: The smaller deals are more difficult and labor-intensive than the larger ones because the smaller ones tended to involve family-owned businesses. They’re not publicly traded or private equity–backed, so there are no GAAP [generally accepted accounting principles] financials; you can’t look up their filings or proxies. You have to spend time getting to know the owners.
Andy West: What about integration? Technology has been a big part of the XPO strategy. How did you optimize the technology infrastructure in the course of integrations?
Brad Jacobs: Two words: fast and standardized. You want to get one ERP [enterprise resource planning] system as soon as possible so you can close the books right away after the purchase. You want to have one CRM [customer relationship management] system, one HR system so everyone can be on the same platform. You get cleaner and faster numbers, and you can share information. On some aspects of integration, you want to be gentle, but on integrating technology platforms, you want to rip off the Band-Aid because you’re not functioning at full level until then.
On some aspects of integration, you want to be gentle, but on integrating technology platforms, you want to rip off the Band-Aid.
Andy West: Which aspects of integration do you think need a gentler approach? For example, you mentioned the importance of accountability, so how did you build that culture through M&A?
Brad Jacobs: We were extremely respectful to the people. We never went into an acquisition with the arrogant attitude that we had all the answers. In fact, just the opposite: in every acquisition we did, we reached out to the organization as soon as we were permitted to do so, and we asked what they thought we should do. We found that to be such a powerful thing. In most cases, frontline employees, middle managers, even senior managers had not been asked for their views by the owners or top management and, as a result, they felt a little checked out.
We did questionnaires, town halls, one-on-one interviews, group meetings, and we would ask a series of basic questions: What are you doing that we would be crazy to change? What are you doing that’s not so great that we should change? What’s your best idea to improve the company? Then we shut up, listened carefully, and documented what they were saying. We would get an avalanche of ideas every time we asked those questions. We discussed them in depth and asked follow-up questions. It’s a powerful integration method that accomplishes two things. Number one: you get buy-in from the organization because the front lines feel the company has momentum to become better. Number two: people had great ideas for how to improve the company. It would give us something to work with to refine our business plan and the hypotheses behind the acquisitions.
In every acquisition we did, we reached out to the organization as soon as we were permitted to do so, and we asked what they thought we should do. We found that to be such a powerful thing.
Andy West: Executives are often afraid to ask those questions because they don’t want to seem to be making promises they can’t keep. How did you ensure that employees felt you were following up on their suggestions without explicitly or implicitly promising to implement them?
Brad Jacobs: That’s a good point, because if you ever make a promise and don’t follow through, that has hugely negative consequences for your ability to lead the company and have the trust of the organization. When I made acquisitions, I would say, “I will only make you one promise: I will try my best, but I will mess up some things, so give me a break and give me some time. And feel free to tell me when I’m messing up.”
Andy West: Integration can be very process heavy, particularly in large acquisitions. How did you balance the need for process rigor with the need to be flexible and listen to input?
Brad Jacobs: Those are not only compatible; they’re mutually helpful. Involving the people who run the business day to day is critical to developing the integration and optimization plan. In terms of the tactics for executing the plan, you have to be organized because you’re right, there is a lot to do when you buy a company and not much time to do it if you want to not skip a beat. You need lists and to assign tasks to individuals. Other people can help them but if you have one person accountable for each task, you are more likely to achieve it on time than if a group is responsible for it. You also need a regular cadence of checking in on the progress. On certain parts of the integration, that’s daily; on others it’s more frequent.
Andy West: Let’s talk about the other side of M&A, which is spinning off parts of the businesses you built through acquisitions, as you are now doing at XPO. How do you make those decisions?
Brad Jacobs: The primary purpose of the senior leadership team is to create shareholder value. Sometimes, the way for us to do that was by buying companies; other times, it was to sell off parts of the companies we bought or even entire companies after we improved them and they no longer fit into the strategy. Sometimes, it was to spin off parts of the company as we did with GXO [manager of outsourced supply chains] last year and are doing with RXO [freight transportation provider] this year.
Sometimes, the way to create shareholder value is to buy back stock, and we did a $2-billion stock buyback a few years ago. Sometimes, it’s through deleveraging. Raising equity is dilutive; selling parts of the businesses you bought is less dilutive and may be accretive and more strategically sensible. So, you have to keep your eyes open, your antennas up, and ears listening to changing circumstances. You have to be sensitive to both threats and opportunities.
Andy West: Many people are afraid of M&A—the execution challenges associated with it, the challenge of finding good assets and then integrating them. What is your view of M&A’s risk profile?
Brad Jacobs: I think M&A is risky and management teams are right to be afraid. I’ve been afraid with every single acquisition I did and was always thinking about what could go wrong. You can mitigate those risks, but M&A is not a low-risk strategy. M&A is much more risky than good, old-fashioned organic revenue growth and good, old sales and marketing. Now, those have less upside. M&A, if done correctly, can create tons of shareholder value.
M&A is risky and management teams are right to be afraid. I’ve been afraid with every single acquisition I did.
Andy West: You are now handing over the CEO role to Mario Harik and will become executive chairs. What advice would you give to boards and other chairs about how they should support management teams as they think about different M&A strategies?
Brad Jacobs: M&A should be considered because it gives you the opportunity to get market share and scale overnight, and in most businesses, scale helps a lot because you can leverage your SG&A [selling, general, and administrative expenses] off a larger revenue base. M&A also gives you the ability to attract talent, maybe talent you wouldn’t get otherwise. It enables you to create a state-of-the-art technology organization because you have the size to support that investment. But I’d be careful about M&A, too. If my management team had not done much M&A, I would be skeptical and provide a lot of oversight. On the other hand, if the management team has experience creating a lot of value from M&A, I would give them a long leash.
Andy West: What’s next for you?
Brad Jacobs: I will still be involved with XPO, but it will be a much smaller percentage of my time while I do my next big thing. I will look at large industries with big TAMs [total addressable markets]. I’m looking at healthcare, financial services, technology, fintech, and industrial services, so I’m casting a wide net. In the past, where I ended up in those searches was always different than where I thought I would when I started. The likeliest scenario is something with a large M&A component, a rollup or a rollout. A rollup would involve M&A and a rollout could involve sales and marketing, helping a company with a great service or product to better penetrate the market, or what I call “rinse, wash, and repeat.” That’s what I did at United Rentals: form a template for a structure or an office and keep opening them throughout the country. In some businesses, it may be appropriate to do that globally.
But I will also look at fixer-uppers. I have done plenty in the past, and I’ll look at opportunities that have wind to their back in terms of growth trends. I’m going to Silicon Valley to meet with my VC [venture capital] friends and see what’s in their portfolios, and I’m talking to my private equity friends about their portfolios. I’ll talk to some of our larger shareholders about companies that are in their portfolios where a stronger management team could turbocharge the business, and I may put $1 billion or $2 billion of my own equity into it, fix up the balance sheet, and provide some growth capital. I’m excited about the hunt.
Andy West: It sounds exciting. Volatility can lead to investment opportunities. How are you finding the temperature as you put your toe in the water?
Brad Jacobs: The temperature is great. It’s like being in the Mediterranean! There are many opportunities because there are so many changes. All these SPACs [special purpose acquisition companies], for example, that were $10 a share six months ago are now $2 a share. They should not have been SPAC-ed in the first place but some of them are great companies that are just out of favor. I could put in $1 billion or $2 billion of new equity, improve the management team, upgrade the board, and we could build a much bigger company than the original owners had envisioned. There are other opportunities with companies that are in distress or ones that are performing well but could perform even better with more vision and capital. I’m not worried at all about finding a good opportunity. But I only do one thing at a time. I’m a serial CEO.