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Roll Up Strategy

The process of acquiring and merging multiple smaller companies in the same industry into a large company

What is a Roll Up Strategy?

A roll up strategy is the process of acquiring and merging multiple smaller companies in the same industry and consolidating them into a large company. Combining small firms into a larger company allows the latter to pull their resources together, cut down on operational costs, and increase revenues.

 

Roll Up Strategy

 

The consolidated company can expand its geographic reach to include markets served by the smaller companies, which also allows it to offer a broader range of products and services than a single, smaller company. Consequently, investors and shareholders enjoy the benefits of a large pool of investments.

 

Practical Example of Roll Up Strategy

Assume that Company XYZ deals in the assembly of computer equipment in North America. Recently, the company experienced a growth in revenues, but its operational costs continued to rise since it sources some of the computer accessories used in computer assembly from other companies. Company XYZ plans to expand its operations by acquiring two small firms that manufacture some of the components it uses in its core operations.

To support the roll-up strategy, the company borrows a loan of $1.2 million. It uses the funds to acquire the two smaller companies, Company ABC and Company JKL. Company ABC deals in RAM chips manufacturing, an essential component that Company XYZ uses in computer assembly, and its annual revenues average $300,000. Both companies agree on an acquisition value of $450,000.

The other target company is Company JKL, which deals in the distribution of computer accessories, and its revenues average $550,000. It also operates in Europe and Southeast Asia. They agree on an acquisition value of $600,000. The acquisition of Companies ABC and JKL will help Company XYZ reduce its operational costs and expand its operations in Europe and Southeast Asia.

 

Benefits of Roll Up Strategy

Companies that use a roll up strategy in their expansion plans enjoy various benefits. Using the example of Company XYZ, implementing a roll up strategy offers the following benefits:

 

1. Economies of scale

Before acquiring Companies ABC and JKL, Company XYZ company needed to outsource RAM chips since they are part of the components used in computer assembly. Also, it needed to rely on other distribution channels to supply its final assembled computers. With the acquisition of the two smaller companies, Company XYZ cuts on costs that it previously incurred in sourcing RAM chips and distributing its products in the market.

Moreover, the acquisition of Company JKL, which deals with the distribution of computer accessories in Europe and Southeast Asia, gives the company access to a wider market for its products. Therefore, by leveraging economies of scale, it can cut down on production costs and increase its revenues.

 

2. Cross-selling

Apart from supplying assembled computer equipment, the company enjoys a wider range of products, including RAM chips and other computer accessories. Cross-selling gives the acquirer a competitive edge compared to other competitors that sell assembled computers only. The key takeaway in cross-selling is the exponential growth that the company expects from selling added products and services to a wide audience.

 

3. Multiple arbitrage

Multiple arbitrage is the process of increasing the company’s value without conducting any operational improvements. Acquiring smaller companies brings about aggregation of resources and revenues, which adds more value to the company that it would on its own.

 

 

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Steps in a Roll Up Strategy

Implementing a roll up strategy comes with setbacks, and the process may be derailed, resulting in a premature transaction. The small company may also be the subject of a hostile takeover when parties on either side fail to agree on the terms of the acquisition. A company implementing a roll up strategy should follow the following steps:

 

1. Form a dedicated acquisition team

To realize a successful acquisition, a separate team is required with different expertise from the one that runs the company’s daily routines. The acquisition team should possess the following sets of skills:

  • Developing winning roll up formulas
  • Finance and accounting
  • Legal
  • Identifying prospective targets
  • Proper negotiation skills to solve disputes among participants

 

2. Merge acquired businesses operations

To be successful in the roll up strategy, the acquirers need to be vigilant with their acquired businesses. One way to achieve it is by merging the acquired companies into a single unit, system, procedure, and under one perspective of running the company. That is why the team behind the acquisition needs to align all the business affairs within the first 100 days of the acquisition.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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