“What is a poison pill in business?” you ask your financial advisor. She explains it’s a hostile takeover defensive strategy and wonders why you asked. You have an interest in a company that buys smaller firms, you tell her then ask, “what is a roll up strategy?” Here’s what you hear …
What is a Roll Up Strategy?
A roll up strategy is the process of a company in a fragmented industry acquiring smaller industry firms and consolidating them to form a larger, more efficient company. The objective is to gain a competitive advantage through market share expansion, economies of scale, increased operational efficiency, and reduced competition.
Examining the key aspects of a roll up strategy will add context to the question; what is a roll up strategy?
Target Company Identification – The acquiring company (the acquirer) identifies smaller firms (the target) for acquisition. The acquirer selects firms within its industry that complement its current business model or add to its existing products and services. This type of strategy is called a horizontal acquisition because the acquired companies are in the same industry as the acquirer and are at similar stages of production.
Due Diligence – A comprehensive quantitative and qualitative analysis is conducted on the target company to assess its fiscal health, operational efficiency, potential synergies, and market position.
Acquisition – The acquirer purchases the target firm using a combination of cash, stock, and debt financing.
What is a roll up strategy? A roll up strategy is an acquisition tactic that begins with identifying a suitable target firm and performing extensive due diligence prior to acquisition. But that’s just the beginning.
Integration – The acquirer integrates the new firm into its operations through operational streamlining, asset and resource consolidation, debt reduction through asset liquidations, brand unification, and joint marketing efforts.
Optimization – The newly integrated company seeks operational optimization through cost savings, increased market expansion, and improved trade and supplier bargaining power inherent to its increased economies of scale.
Growth – Consolidating fragmented companies into a larger industry player allows the acquirer to growth through organic initiatives and pursue additional external acquisitions.
A roll up strategy has acquisition and operational benefits, but what are the drawbacks?
Roll Up Strategy Drawbacks
High Cost – Acquiring multiple companies is expensive. Purchase prices, investment banking fees, legal costs, break-up fees, financing fees, and integration costs can run into the tens of millions. When debt financing is used for the acquisition, the additional interest payments can put a strain on the newly formed firm’s revenue and profit margins.
Culture Resistance – Integrating companies is a complex, time consuming pursuit. Differing corporate cultures can lead to incompatible management styles, and processes disconnects fostered by resistance to change and hindering the integration process.
Financial Risk – The acquirer’s debt levels increase as more companies are acquired. If anticipated synergies do not translate into increased revenue, the additional interest payments can threaten the acquiring firm’s financial stability.
Employee Attrition – Employee uncertainty is a negative externality of acquisitions. This anxiety manifests in the loss of key personnel, and increased turnover leading to lower productivity, precipitated by decreased morale.
What is a roll up strategy? A roll up strategy is a strategic option for firms looking to enhance their competitive advantage through accelerated external growth and improved efficiency. However, the prudent company must carefully assess their managerial and human capital resources and realistically evaluate their capacity for successful execution.
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