Billionaires Have Better Brains

Hertz’s CEO was angry about falling behind to United Rentals.

“You made me change one of my tag lines. I had the largest car rental company and the largest equipment rental company in the world. And now I’ve got the largest car rental company, and the second largest equipment rental company. I don’t want to be second in anything.”

He scolded Brad, “You’re making a mess of it. You’ll screw up the whole industry and go bankrupt!”

Brad responded, “Look, you’re smart. And I respect that you know the industry, but United Rentals isn’t going bankrupt. We have a winning plan here. And I don’t have a dominant share of the market. No one does. So go out there and beat me. Win your tag line back.”

Hertz never beat United Rentals after that.

Last week on Methods of Prosperity.

Brad Jacobs was born on August 3, 1956, in Providence, Rhode Island. He attended a gifted summer program in art and music before entering college early. Brad dropped out of Brown University in 1976. During the Iran hostage crisis, petroleum prices had reached all time highs. OBSCENE PROFITS was the headline one evening of CBS News. That inspired him.

He co-founded a private oil brokerage named Amerex Oil Associates Inc. in 1979. A brokerage is low cost and low risk. All they needed was a phone. The opportunity was in the price discrepancy between buyers and sellers. It was arbitrage between futures and cash markets.

Amerex turned into a leading oil brokerage firm. He was 23 years old, and had no prior experience in the oil industry. Within four years, Jacobs and his partners made $4.7 billion in annual brokerage volume. They had offices worldwide. They pioneered a global IT network for data sharing.

In 1983, Jacobs founded Hamilton Resources Ltd. It was also a private company. Hamilton achieved $1 billion in revenue over six years by leveraging information sharing. Spotting new opportunities, he transitioned to waste management in 1989. He founded United Waste Systems, which went public in 1992. He sold in 1997 for $2.5 billion. He then entered the construction equipment rental industry, founding United Rentals in 1997. He took it public the same year. His growth strategy emphasized acquisitions from the start. United Rentals used data science for a competitive edge. Over 13 months, it was the largest equipment rental company in the world. United Rentals surpassed the market leader, Hertz.

Part 61. Brad Jacobs (conclusion).

You can find this week’s TL;DR here.

Key Lessons:

• Automate as much as possible.

• Expect positive outcomes.

• Find and fix inefficiencies.

• Be better not only bigger.

• Prioritize technology.

• Get the culture right.

• Embrace problems.

• Invest in A players.

• Go after big deals.

• Meditate.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 24 is available to collect as of August 9, 2024. If you’re so inclined you can permanently own it!

In 2007, Jacobs sold United Rentals to Cerberus Capital Management LP. The private equity firm did this through its subsidiaries. RAM Holdings and RAM Acquisition Corp paid $7 billion. This included their assumption of $2.6 billion of debt. He stepped down as chairman.

That’s when the sub prime mortgage crisis hit. On November 14, 2007, Cerberus defaulted, backing out of the deal. United Rentals stock plunged 31 percent in 24 hours. Over the course of the following year, stock fell to $5. United Rentals filed a lawsuit to enforce the merger agreement. Cerberus also filed a suit to limit its liability to a $100 million breakup fee. United Rentals didn’t seek another buyer. Today, United Rentals (URI) is trading at over $700 per share.

In 2010, he established Jacobs Private Equity LLC. Then, in 2011, he repeated the same roll up strategy as with the previous industries. This time he chose the truck brokerage sector. He noticed that this was an opportunity to take advantage of another big trend. His oil brokerage had a similar business model. Truck brokers match industry carriers to shippers. Brokers in the position to have a direct connection to the entire freight landscape. This is on both sides of the equation. For the most part, shippers who use an in house department to source trucks have limited capacity. While small carriers don’t have the market facing resources to reach out to a large number of shippers. An efficient truck broker will get their load to its destination with few empty miles. What’s more, they will be more efficient with fuel and costs than an inefficient truck broker. Most truck brokers in 2011 were inefficient. They operated over the phone instead of using digital technology.

Brad Jacobs founded XPO Logistics in 2011. He turned it into one of the world’s leading transportation and logistics providers. He did this through strategic acquisitions and expansion. He used scale, data science, and automation. He prioritized technology investments. XPO’s tech team created an automated digital transportation network. It spans a nation wide virtual freight market place. It provides a single repository of information. It facilitates private transactions in the cloud. Huge amounts of data flow into the platform in real time. This system is in use today as RXO Connect in North America, and XPO Connect in Europe. RXO Inc. and GXO Logistics, Inc. are spin-off companies from XPO. He currently serves as the executive chairman of XPO, Inc. and holds non-executive chairman positions at RXO Inc. and GXO Logistics, Inc.

Brad only does deals where the downside scenario is still good for the company. Think of it like a game of heads or tails. Heads you win, tails you don’t lose much. Brad’s basic rationale for any M&A deal is the following question. How will doing this deal contribute to the two main drivers of shareholder value? Which are pleasing customers and propelling financial results.

He asks, “How will doing this deal convince more customers to wire money from their bank account to ours?”

In conclusion, your M&A deals need to make your company better, not bigger. A good M&A deal needs to drive stock holder appreciation over the next five to ten years. Cash flow projections need to be higher than at the time of acquisition. There needs to be a clear path to significant growth. Due diligence needs to be efficient. Weeks instead of months is best. The deals you avoid may contribute to your success more than the deals you’ve done. No deal is better than a bad deal.

Also, understand that a seller is usually under pressure. It may be a distressed business, or a life cycle change like divorce. Don’t kill the deal out of personality conflicts or lack of empathy. Get the culture right. It can be a challenge to make sure integration is smooth. Company cultures can be different yet compatible. It doesn’t work if your values are not in alignment. Brad meets face to face with the top fifteen people in the company he acquires.

Operational integration needs to be efficient. That requires a seamless integration into the technology stack. There needs to be one enterprise platform, one human resources system, one CRM. One business intelligence database, one internal social media community, one KPI dashboard. There needs to be one training curriculum, and one email system. Branding, marketing and services are a part of this process.

There’s a lot more to his strategy of M&A, roll-ups, and arbitrage. Capital allocation, recognizing trends, hiring excellent teams, tying compensation to results. He’s known for his entrepreneurial spirit and strategic acumen. Jacobs has completed over 500 merger and acquisition deals throughout his career. Imagine the challenge of creating one billion dollar business. Brad has created seven, so far.

The last thing to mention is the first thing Brad talks about in his book, How to Make a Few Billion Dollars. That is mindset. He goes beyond what most executives emphasize.

“If you want to make a few billion dollars, you’ll need to think differently and expansively.”

Conventional thinking often fails. He recommends mind exercises, elaborate meditations, which he refers to as thought experiments. Retraining your brain is the psychological key to your success. You can start to perceive information from unusual perspectives. This allows you create expansive experiences. It’s more than optimism. We must recognize realistic pessimism. He calls it dialectical thinking. Expect positive outcomes. Refute negative automatic thoughts. They are cognitive distortions. Don’t let your intrusive thoughts win. Understand that perfection doesn’t exist.

Embrace the problem. The reality is that solving problems is your job. Each problem is an opportunity to remove an obstacle and get closer to success. Problems are not something to avoid, but something to run toward. Problems are the byproduct of risk. The bigger the problem, the greater the value you can create for others. Recognize mistakes and course correct. Find the inefficiencies at the core of the problem. Find ways for your team to reduce operational defects. Make sure you have the right people in key positions. Many problems are self inflicted.

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.