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.
The consolidated company can expand its geographic reach to include markets served by the smaller companies. It can also 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 a Roll Up Strategy
Assume that Company XYZ deals in the assembly of computer equipment in North America. Recently, the company experienced growth in revenues, but its operational costs continued to rise since it sources some 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 $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. XYZ and ABC agree on an acquisition price 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. XYZ and JKL 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 a 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 down on costs that it previously incurred in sourcing RAM chips and distributing its products in the market.
Moreover, the acquisition of Company JKL, which operates 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, XYZ will now enjoy selling 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 wider 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 the aggregation of resources and revenues, which adds more value to the company.
Steps in a Roll Up Strategy
Implementing a roll up strategy comes with challenges and the process may be derailed, resulting in a premature transaction. 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 with the necessary expertise should be formed. The acquisition team should, ideally, possess the following sets of skills:
- Developing winning roll up formulas
- Finance and accounting
- Legal
- Identifying prospective targets
- Good negotiation skills
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 this is by merging the acquired companies into a single entity.
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 CFI resources below will be useful:
