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. Roll ups are a valid way of creating shareholder value. They proceed on the basis that the main company can acquire a number of smaller players in a fragmented industry and achieve cost savings as well as a better value proposition in a relatively short time span.Combining small firms into a larger company allows the latter to pull their resources together, cut down on operational costs, and increase revenues.
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 ABC, implementing a roll up strategy offers the following benefits:
- Economies of scale
- Multiple arbitrage
Three stages in a successful roll up strategy:
1. Creating the Acquisition Vehicle
Rarely is it the case that the proponents of the roll up can acquire the first target and then rely on the management of that first target to execute the rest of the roll up. The reason is that there is a completely different skill set required in running the acquisition vehicle than there is in running the operations of a target. Skills such as:
- Developing a winning formula,
- Identifying dozens of prospective acquisition targets,
- Negotiating fairly and rationally with these targets, and
- Quickly establishing a pre-eminent position in the industry
are all quite different to running a target company day-to-day. There is no rational reason to think that the target team has any experience in any of this.
The acquisition team must also have the ability to transform target companies and integrate them quickly into the acquisition vehicle. It must also negotiate with dozens of targets without getting caught up in the thrill of the chase which is often the cause of overpaying. People with these skills must be assembled before the first acquisition because again, it is unlikely that the management of any of the targets possess these skills.
The acquisition team also needs to have the legal, financial and accounting skills to make several acquisitions a month. These skills, however, are not sufficient. There must also be bench strength in the integration of dozens of disparate businesses into the one overarching business model. Above all, the acquisition team needs to have excellent interpersonal skills to deal with everyone from disgruntled formerly independent owners, management who feel threatened by change and staff who are fearful of losing their jobs.
The strategy is most successful when the acquisition team keep the purchase price within the pre-agreed range. This works well when businesses are purchased on a multiple of, say, three times earnings, then incorporated into the larger entity which might command five or six times earnings. If the larger entity lists on the stock exchange, it might command a nine times earnings multiple. Because of the “private to public uplift,” a private business acquired for three times earnings is instantly worth nine times earnings simply by being part of a publicly listed company.
2. Compete in the Market Place as a New, Cohesive Company
The aim of a roll up is to incorporate dozens of formerly independent companies into the one cohesive whole. This means the acquirer must genuinely integrate the targets and focus the efforts of formerly independent operators. It is not sufficient to have a loose confederation of companies doing it their own way. It is not sufficient simply to cut costs by consolidating the back office functions or advertise under the one banner. The A Team must get into the targets at the operational level and transform the systems, procedures and thinking so that everyone is shooting for the same targets. This can be difficult when the acquiring company is buying former competitors. For years they were each other’s enemies, can you really now ask them to co-operate? Only an experienced roll up practitioner can make this work.
What the acquirer’s A Team has to do is transform the way each target operates. It also has to do this quickly – usually in the first hundred days. If this is not executed immediately and with gusto, the old ways of the target will stay and the forecast synergies and competitiveness of the roll up will not be achieved. Transformation takes great skill and should not be left to the “junior pies” in the acquirer’s team. It should definitely not be left to the management of the targets. It needs to be done by the high achievers on the acquirer’s team and the need for these elevated skill sets is the reason for the high management costs in the acquirer.
You cannot rely on the target teams to do this because more often that not, they feel that growth and strategy is now the acquirer’s problem. They can also feel that if there is no overarching business vision that they have bought into, then they will pursue their own objectives, not yours.
3. Achieve Market Leadership Quickly
Imitation is the sincerest form of flattery. If you are executing a successful roll up initially, there is no reason other roll up practitioners would not flock to your happy little sand pit of fragmented players. The more successful you are, the more you will draw attention to your strategy. When others see your success in cutting costs and driving revenue, you can expect competition.
This is why you need to achieve critical mass quickly. The other issue is that if you take too long, potential targets see what you are doing and start to hold out for higher multiples or other conditions that are incompatible with your initial plan. Since the roll up strategy depends on acquiring targets, the temptation becomes to pay the higher price or to agree to incompatible terms simply to stay on track with the initial overall growth timetable.
There may be ways to address the issues with later stage targets. You could offer:
- Employee share ownership plans (“ESOPs”).
- Shares in the acquisition vehicle as well as cash for the acquisitions.
- Earn outs that reward future performance.
Steps in a Roll Up Strategy
The exec has created a new vision. It is compelling, exciting and future-thinking, but it is also corporate, boardroom-focused and high-level. How can the message be translated and rolled out to the wider organisation?
Get under the skin of the corporate speak. Work with the exec or leadership to understand:
- What will it mean for individual business units or functions?
- How will the strategy play with this new vision?
- What are the current implementation plans?
- Where will your values fit in?
- What will this new vision mean for peoples’ behaviours?
- Does this affect your current ways of working or cultural underpinning?
The best way to pull all of this together is by using visual tools and considering metaphors to start the translation process. Ensure you start the senior managers’ engagement process at this early stage; this will pay dividends when you come to roll it out.
The key to successful implementation isn’t in the content alone, it is in ‘how’ it is delivered. Use well-established techniques such as storytelling and building a human connection, to help leaders shape the narrative and how it is best communicated. Start to build personal connection and ownership of the vision and what it is to achieve. If these skills are not well developed, then now is the time to seek help in developing them.
Design the mechanism by which it will be rolled out to the wider team. Many, many options exist, such as workshop-in-a-box, animations, rich pictures or video, but whichever methodology you choose, consider how you are building engagement and personal ownership. If you need tips on how to do this, then look at this article which offers practical ways to share your strategic vision.
Practise the roll-out. Don’t just assume that the leaders
will be able to roll it out effectively. Hold facilitated run-through sessions,
ensuring that the context is explained consistently, passionately and with a
high degree of human connection and ownership. By that time, the leaders should
be well-versed in the messages and story to share at the cascade workshops.
Conclusion All companies need a business plan when
they are starting out—but established businesses also need to look at their
plans and revise them for the needs of investors and the market.