by Lauren Dever
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Roll ups are predicted to be a significant part of M&A strategy in 2021. Historically, they have faced both praise and criticism from industry experts — at times dubbed fool-proof ways to generate value, while at other times called out for high failure rates. With these conflicting views in mind, below we clear some of the smoke around roll up strategies by utilizing practitioner experience and professional research to demonstrate how genuine M&A software can significantly help you with your roll up strategy.
What is a Roll Up Strategy?
A roll up strategy is defined as the planning and buying of multiple businesses within a specific industry. For example, Kraft going on a deal spree and buying smaller dairy companies to support its foods business. Simply put, companies employing a roll up strategy are completing a large number of transactions in a short time frame (perhaps 2-3 years); not all of the deals they complete are transformational deals (i.e. not billion dollar deals with large, complex integrations), but they are value generators.
How Does a Roll Up Strategy Create Value?
When a company presents a roll up strategy, there are several common ways value is generated:
- Economy of scales — combining smaller companies into a larger entity allows for resources to be pooled and operational costs to be reduced due to the leveraging of the acquirer’s buying power to lower prices on materials and goods. Generally, smaller companies are charged more than larger companies for similar products, which then results in higher per unit costs. Employing a roll up strategy allows for lower unit cost through more efficient buying power; operational costs are reduced, but selling price can remain constant, resulting in increased value and revenue for the acquirer. A general rule of thumb for roll ups, then, is the roll up must produce operational cost savings.
- Reduced competition/larger market share — by acquiring smaller companies in its market space, a company effectively reduces its pool of competitors, while simultaneously increasing its market share. Smaller niche players can drain market share from larger players, but by acquiring these types of smaller competitors, an acquirer reaps the benefit of increased market dominance.
- The ability to cross-sell — cross-selling gives a company a leg-up on its competition, as it allows customers to access multiple products/services from a single supplier; this results not only in customer advantages, but also in the expansion of the acquirer’s customer base
- Increased value of acquiring company — by combining its resources with those of the roll up(s), the acquirer increases its overall value without having to make operational improvements. Ideally, the businesses purchased in the roll up strategy are acquired at a relatively low price, and when the strategy is executed properly, the newly formed entity becomes much more valuable and can, if desired, be sold at a considerable profit.
- Access to critical and expanded customer data — the acquirer can leverage the customer information gained from the roll up(s) to support its present and future marketing and growth strategies.
- New talent competencies inherent in small businesses are often by-products of effective roll ups - smaller company managers are adept at creating and launching new products based on the feedback of its customer base. Such talent is not often a core competency of large acquirers, but they can learn and assimilate these key management skills to enhance the roll up value.
Finally, when it comes to value, Galina Wolinetz of Virtas Partners notes, upfront planning of a “properly structured integration program is essential to extracting value from a roll up, as you want a predictable, repeatable pattern focused on your overarching goal that can be customized for each company.”
What Are Some Best Practices When Executing a Roll Up Strategy?
Every deal is different, but the following guiding practices from industry experts can be applied to most roll up deals:
- Be diligent about target tracking and evaluation
- Focus on the customers you will be serving
- When integrating smaller, “mom and pop” businesses, you must include the founders and win employee loyalty
- Invest in change management and, during these often quick integrations, hone your focus on cultural integration
- Fight disjointed entities with strong leadership and integration practices
- When possible, have a practitioner experienced with roll ups on your team or serving as a mentor
What Are Some Roll-Up Strategy Acquisition Examples?
Public Storage — After engaging in an extensive roll up strategy, the Public Storage company now boasts it can be found nationwide around every corner. Its roll up strategy has generated value and made them a dominant player in an industry that previously did not have such a decisive dominant force. In fact, in the early 2000’s, it was named an S&P Fortune 500 company.
Waste Management Inc. — Waste Management Inc. is said to have begun with a single garbage truck, but then went on a shopping spree and acquired over 100 other garbage haulers. This led to the company going public in the ‘70s, and by the ‘80s, it was the largest waste removal company in the United States.
Quest Diagnostics — Quest Diagnostics, a medical lab, testing, and diagnostics company, engaged in a roll up strategy by buying owner operated smaller labs and diagnostic/testing sites. This took their revenue of $1.5 billion to $7.5 billion, and, as a result, they are often touted as a successful example of roll up strategy.
Mondelez — Mondelez enhanced its snack-focused portfolio by acquiring Tate’s Bake Shop, Perfect Snacks and most recently Hu Master Holdings (all smaller, niche players in the snack market)
Lactalis Group (French based company with facilities in US) — Lactalis Group acquired Kraft Heinz’s natural, grated, cultured and specialty cheese businesses in the US, grated cheese business in Canada, and the entire international cheese business outside of North America.
Unilever — Unilever has performed a significant number of rapid smaller acquisitions in the beauty and personal care space since 2015, for example, Dermalogica, Living Proof, Kate Somerville, REN, Murad and, most recently, Olly Vitamins. These all became part of Unilever’s Prestige Group and gave Unilever expanded customer data in the personal care space (Unilever has a strategic objective to grow in personal care), plus access to smaller company talent that had experience and success with rapidly developing and marketing new product offerings based on customer feedback.
Mass General Brigham (formerly Partners HealthCare) — Partners rolled up Mass General Hospital, Brigham and Women’s Hospital, Mass Eye and Ear, McLean Hospital and a group of smaller community hospitals and urgent care centers into one major integrated healthcare network.
Which Industries Are Prime For Roll Ups?
Industries that lack a key leader or are fragmented — Industries without a key leader, meaning the top 3-5 companies make up less than 40% of the market share, are prime/ripe for disruption and takeover. Oftentimes, these industries are populated by “mom and pop” businesses that can be willing targets.
Industries related to necessities/basic needs — Port-a-potties, medical clinics, dentist offices, waste management...these are some of the most common industries where roll up strategy has been implemented. The logic here is fairly simple: people will always need these goods and services, and they span a wide geographical profile. In fact, medical facility roll ups have been increasingly popular over the last decade.
Industries that are easier to understand — Roll ups are well suited to less complex businesses since the overarching goal is quick assimilation into the acquirer’s portfolio to create value.
Why Is Midaxo the Best M&A Platform for Roll Up Strategies?
Since Midaxo focuses on the three main case uses in M&A and provides one clear source of truth, it is the ideal M&A software for companies interested in executing a roll up strategy. Specifically, Midaxo assists the roll up process by:
- Helping to identify and evaluate targets - As an end to end solution, Midaxo includes key features related to identifying, evaluating, and tracking targets, eventually moving them through the pipeline in a methodical, organized manner. In particular, Midaxo’s actionable pipeline health metrics help practitioners evaluate more deals (up to 5 times more) in less time.
- Improving integration - More specifically, Midaxo’s M&A software and platform is ideal for the types of integrations required with roll ups. Roll up integrations often occur in quick succession - the ease of Midaxo as one resource that does it all eases the complications of integration. All priorities, tasks, initiatives, and issues are stored and accessed in this one solution, keeping your team organized and integration on track. Many of our partners credit Midaxo’s software as a major component of their improved, streamlined integrations.
- Providing a full complement of resources - Most notably for roll ups, Midaxo provides playbooks that are easily repeatable for those doing multiple deals and managing quick deal cycles. The simplicity of Midaxo’s data room and strong customer service and support make on-boarding quick and easy for roll up teams. Playbooks, combined with ease of use, ensure companies employing a roll up strategy can quickly assess value and report it up to the PE firm, which is basically looking at two key metrics: money generated and speed. Midaxo helps deal makers effectively reach and identify both metrics.
As with most M&A activity, the decision to utilize a roll up strategy must stem from a strong, evidence based strategy. As each acquisition in the roll up moves through the deal cycle, smooth integration becomes challenging, but remains paramount to the success of the strategy and value creation.
How to Make Roll-Ups Worth It
We spoke with Virtas Partners on this topic, covering how to manage risk through structured integration programs.