What happens when a boring holding company accidentally becomes a meme stock
Low-float industrial roll-up holding companies are clearly where it’s at in 2024.
Brad Jacobs is a serial entrepreneur who has made “a few billion dollars” building different industrial and logistics companies, such as XPO Logistics, United Rentals, and United Waste Systems. Last December, he invested $1 billion ($900 million from his own private equity shop, and $100 million from Sequoia) in a ~$20 million market cap company, SilverSun Technologies.
The reason for the investment was that Jacobs wanted to create a publicly listed shell company to acquire companies in the building-products distribution market to build a multibillion-dollar industrial roll-up, and the fastest way to create a publicly listed shell company was, from his perspective, to add $1 billion to the balance sheet of a tiny company, pay the existing shareholders of the tiny company a $17.5 million dividend (up from an initially-planned $2.5 million), and manage the newly-capitalized, publicly traded “company” with $1 billion of cash and the operations of the existing entity, which provides technology solutions primarily to companies in manufacturing, distribution and service sectors.
At first glance, Jacobs’ investment resembles a SPAC. SPACs, which exploded in popularity in 2020, are shell companies that raise money from investors, IPO, then look for private companies to “take public” through reverse mergers. However, in a Yahoo Finance interview from December, Jacobs was critical of the incentive structure of SPACs:
I don't like SPACs, from the point of view of I don't know that there's a real fair alignment between the promoter, so to speak, and the investors. They don't put any money in usually. And they get 20% off the top. What I'm doing is something very different. We're actually putting-- we're putting our money where our mouth is. We're putting a dollar billion into a very small-cap company. It was $15 or $20 million market cap as of a few days ago.
And then we're going to spin back that company to its legacy shareholders. We're going to give them a little dividend, $2.5 million. We're going to give them a little taste of the new company, like less than half a percent. Then we'll be left with a publicly traded company with a billion of cash in it. And we're off to the races.
So he opted for the derivative of a SPAC: instead of raising $1 billion to find a private company to take public, he invested $1 billion in an already-public company and used it to find other private companies to roll up in his already-public company. (Since that interview, management decided not to spin off SilverSun).
Anyway, there was a lot of institutional demand to invest in Jacobs’ new venture, and in June, he announced that he had raised an additional $3.5 billion, at double the price per share of his initial investment, and earlier this week, Jacobs raised another $620 million, at the same share price as the last fundraise, including $150 million from Jared Kushner. All in all, the “company” will have approximately $5 billion in cash on its balance sheet once the funding deals close, with approximately 740 million shares outstanding (~671 million shares from the first two funding rounds, including warrants, as well as 68 million shares from the latest round).
Jacobs’ and Sequoia’s shares were priced at $4.57 per share (with some warrants priced higher), while the later investors got their shares for twice that price: $9.14 per share. QXO is currently trading at $90.01 per share, up more than 3x from its price before Jacobs’ deal (adjusted for a reverse split), meaning this shell company with $5 billion cash is worth approximately $70 billion, and its stock price has moved back and forth between $40 and $240 per share since Jacobs announced his initial investment. It turns out that Jacobs’ new book, “How to Make a Few Billion Dollars” may be the most apt book title of the year.
What’s up with the insane price movement? While QXO has raised billions, the only shares currently trading on the market are the ~660,000 shares held by the original SilverSun shareholders (as noted in Jacobs’ initial announcement, SilverSun shareholders would retain 0.15% of the new company), so the supply is really low for an investment that is, obviously, really hot (even institutional investors paid a 100% premium to Jacobs’ price!). As a result, daily trading volume has only surpassed 100,000 shares three times in 2024, making the stock susceptible to wild price swings.
This is not investment advice, and I think anyone can do what they want with their money, but paying $90 per share to invest in a shell company that everyone else paid $9.14 to invest in doesn’t seem like a great deal!
