Trend Tracker September 2021

September 7th, 2021 by Nathan Hobbs

Reading the Signs: The Acquisition of Paradigm Points to a Value-Adding Role for Technology

By Michael Collins

The recently announced acquisition of WTS Paradigm by Builders FirstSource Inc. (BFS) has interesting and important implications for door and window manufacturers, as well as for the overall building industry. We view the acquisition of a software company by a building materials supplier as a positive sign. This industry has lagged behind other industries in terms of investment in technology. This also means the building industry has experienced far fewer productivity-enhancing breakthroughs than segments such as healthcare, automotive, finance and manufacturing.

Publicly announced aspects of the BFS-Paradigm deal help us to engage in educated speculation about the behind-the-scenes motivators. The total purchase price was disclosed to be $450 million. While the earnings before interest, taxes, depreciation and amortization (EBITDA) multiple wasn’t disclosed, speculating about possibilities is interesting. It was announced that WTS Paradigm projects 2021 revenues of roughly $50 million. It’s difficult to think the EBITDA would be any lower than $10 million or higher than $30 million, and $20 million is another interesting potential EBITDA level to consider. An EBITDA level of $10, $20 or $30 million would result in purchase multiples of 45, 22.5, or 15 times EBITDA, respectively.

Crafting Combinations

When an acquirer approaches valuations this high, it is nearly certain that they are counting on being able to utilize the target company’s business to drive additional earnings from the buyer’s own business. In that way, a buyer can focus on a lower effective EBITDA multiple when looking back at the actual closing EBITDA multiple. An effective purchase multiple is not something that will ever show up on a financial statement or disclosure.

The software WTS Paradigm provides helps its customers increase sales, lower costs and operate more efficiently. BFS is uniquely positioned to leverage the value of Paradigm’s software capabilities across the existing BFS base of homebuilder customers. BFS CEO Dave Flitman cited his company’s ability to provide additional value to homebuilder customers by helping
them improve their own businesses.

The IT consulting group at Deloitte has determined there are a variety of reasons for reluctance to implement new technologies. These include the need to train workers on new systems and establish cybersecurity protocols for each new technology implemented. Other daunting factors include the risk of overshooting sizable implementation budgets, and the risk of failure once new technology solutions are implemented fully. Companies willing to dive into the breach and take on these challenges stand to be rewarded with increased speed and efficiency of operations, greater agility as an organization and improved flexibility for responding to new challenges. Also, employees and managers who stay the course and implement new technologies are the foundation upon which a company’s future growth can be built.

It will be interesting to see if other software solutions providers will be snapped up by building materials suppliers in the next two years.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com

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