Why Did Builders FirstSource Spend $450 Million on a Software Company?

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Why Did Builders FirstSource Spend $450 Million on a Software Company?

The building materials behemoth dropped a sizable pile of cash on a software provider as the distributor doubles down on its digital capabilities.
Builders FirstSource acquires Paradigm

Builders FirstSource Inc. is ramping up its digital capabilities in a big way, dropping nearly half a billion dollars to bring an industry software expert in-house.

The Dallas-based building materials distributor — ranked No. 1 on MDM’s Top Distributors Building & Construction list — announced this week that it will pay $450 million in cash to acquire WTS Paradigm LLC, a software solutions and services provider for the building products industry.

“Purchasing Paradigm is an important step in advancing our digital strategy to create significant construction process efficiencies through prudent investments in innovative technologies,” said Dave Flitman, president and CEO of Builders FirstSource. “Home construction lags far behind other major industries in the adoption of modern tools that can save time and money and reduce waste.”

Based in Middleton, Wisconsin, Paradigm “specializes in technology, software development and consulting services that help manufacturers, retailers and homebuilders in the building products industry boost sales, reduce costs and become more efficient.”

“Becoming a part of Builders FirstSource will unlock 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, Paradigm founder and CEO. “I look forward to working with the Builders FirstSource team to enhance homebuilding through digital tools.”

Builders FirstSource has certainly grown its customer base in recent months to warrant such an investment in scaling digitally. In addition to a couple of strategic deals in 2021, the company last year merged with BMC Stock Holdings in an all-stock transaction valued at $2.5 billion.

That move propelled Builders FirstSource to the top of MDM’s Top Distributors list for Building & Construction, edging out previous No. 1 ABC Supply Co. It also gave Builders FirstSource the momentum to pursue an equally ambitious deal in the software and technology space.

“Our unmatched scale, industry relationships and technical knowledge uniquely position us to increase the adoption of digital solutions across a fragmented customer base,” Flitman said. “Paradigm’s powerful technology platform provides us with an enhanced customer value proposition, helping fuel long-term growth by establishing a leadership position in digital solutions for homebuilders.”

Nice addition … but how much did BLDR spend?

Wall Street has seemed unsure of the deal to start. Shares of Builders FirstSource (Nasdaq: BLDR) have been flat since the company announced the deal on Tuesday. Perhaps it’s because Paradigm is expected to generate only $50 million in revenue this year, meaning Builders FirstSource paid a multiple of 9x for the company.

That lofty 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 Tag.”

“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 eye-poppingly high for distribution industry observers,” Manthey wrote. “Net, we like the capabilities and possibilities this deal brings, but do not love the price tag. Despite our sticker-shock, BLDR remains a top idea as current conditions remain very favorable and the merits of this transaction will emerge over several years, not quarters.”

Baird outlined what it sees as the strategic rationale for the deal, including the following benefits:

  • Deal gives BLDR first-mover tech advantage. “Technology has historically not been a priority in the single-family homebuilding/renovation market, but the importance is clearly accelerating. This deal gives BLDR a first-mover advantage with what they view as the best technology in the single-family market.” Baird compared this move to what Watsco has been doing in the HVACR space.
  • Share gain opportunity. Paradigm’s capabilities, including the ability to convert blueprints into 3D renderings, “opens BLDR up 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 expansion. “We believe Paradigm and digital broadly is inherently a more efficient sales process with reduced selling/labor needed, allowing BLDR to leverage growth more effectively.”
  • Defensive move. “BLDR sees Paradigm as the clear technological leader in the single-family space. We believe there was likely significant interest in acquiring Paradigm from direct BLDR competitors and other strategic/financial players in the building products industry.”

These benefits make sense based on Builders FirstSource’s own strategic rationale for the deal. The company said of its reason to add Paradigm: “Across the homebuilding industry, digital trends are accelerating, and customers desire additional solutions that drive process efficiency in complex homebuilding projects. Driving construction process efficiency is an excellent opportunity for digital technologies.”

Added Craig Webb of Webb Analytics LLC: “Builders FirstSource’s willingness to pay 9x WTS Paradigm’s expected 2021 revenue shows how much BFS is betting on manufacturing, technology, and services. Paradigm built itself up in large part by creating ERP systems for door and window manufacturers—two businesses that require mass customization. Now it’s offering a suite of products that make possible end-to-end communications from the home seller through the designer and distributor (via takeoff and virtual home design software, for instance) up to the manufacturer and back down the chain again. This connectivity, combined with what’s in each tool, will make all parties in the process more nimble and efficient.”

Beyond that, what does this deal mean for Builders FirstSource’s traditional acquisition appetite moving forward? Does the company pause its M&A activity and allow Paradigm the time to scale up to match its massive footprint? Or does the distributor continue to seek out strategic deals and pad its Top Distributors lead?

Stay tuned to this space for more news and analysis on Builders FirstSource’s moves — and M&A across wholesale distribution.

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