What is Roll-up Merger and how does it work?

If you’ve ever witnessed the construction of a brick wall, many layers of brick and cement form a solid wall. The cement is laid out and the bricks are placed over it to form a neatly stacked yet strong barrier. A Roll-up works on a similar concept. Before venturing deeper into the meaning of a Roll-up, let’s understand the meaning of “Roll-up merger” and how it works.

What is Roll-up Merger?

Roll-up merger = Roll Up + Merger (to increase by accumulation) (combine)

In financial terms, a merger implies combining two or more companies belonging to the same market to make it a larger and stronger one.

A Roll-up merger works when two or more companies with complementing or similar lines of businesses join together to rationalize competition. The resulting company is larger, more equipped to cut operational costs, has a larger resource pool and an increased base of customers to drive revenue. A practical example of this is Reliance Industries. In 2019, the company made 8 acquisitions which included trailblazing startups like Fynd, Haptik, C-Square, Reverie Language Technologies, Sankhya Sutra Labs, and more. These acquisitions, and a few more over the past few years, have made Reliance one of the largest companies in India today.

How does a Roll-up merger work?

A Roll-up merger involves different cultures, mindsets, and skillsets. It is accomplished in three steps:

1. Simply roll up the financials into one entity and let the businesses run as they were running before.
2. Integrate all back-office functions across all companies (e.g. HR, administration, Insurance, etc.)
3. Integrate all front-office functions (e.g. cross-selling products, centralized brand, etc.)

For example, let’s say XYZ Co. is an organization that manufactures cars. It used to outsource batteries from DEF Ltd. (a battery manufacturing company) and engines from QPR Ltd. (a tire manufacturing company) which accompanied a huge cost. To leverage economies of scale, reduced cost, and quality products, XYZ Co merged with DEF Ltd. and QPR Ltd. This is also known as cross-selling and one of the ways of an efficient Roll-up Merger.

Benefits of a Roll-up merger

Every change comes with its sets of advantages and pitfalls. The fact remains that varied culture, employee resistance, and lack of coordination may make roll-up mergers an absolute disaster but at the same time it can prove to be of utmost advantage for the following reasons:

1. Rationalize competition

   When companies belonging to the same brand combine, it rationalizes competition which also leads to competitive product pricing.

2. Geographic Coverage

   A merger of companies from around the nation leads to better geographical coverage and an increase in market share.

3. Reduced cost

   It is a well-versed/widely known fact that “More quantity, less cost” i.e., Price and Quantity are inversely related. Similarly, Roll-up Mergers help businesses achieve higher output while reducing operational costs.

4. Increase in market Valuation

   It is a general industry practice that Larger and Rolled firms are valued higher than smaller companies and also better positioned for Initial Public Offer (IPOs)

What are Roll-up Strategies?

Roll-up strategies are an extension of a Roll-Up Merger or rather a part of it. The above example of the XYZ Co. merger is one such example of a Roll-up strategy. It is simply a process of acquiring and merging one or multiple smaller companies belonging to the same industry and merging them into a larger company.

Roll-up strategy leads to cross-selling, which ultimately offers a wider range of products and services to the customers and reduces operational costs, resulting in increased revenue.

Increased Quantity = Less Cost = More Revenue

The roll-up strategy has enormous advantages. However, consolidated companies offer better economies of scale, a large pool of investments, more reach, integrate complementary capabilities of different organizations, and better expertise. It is commonly known as the ultimate one-stop solution!