In consideration of the humble roll-up

Weekly Corporate Growth Report, Sep 16, 2002 by Dolbeck, Andrew

The Merriam Webster Collegiate Dictionary defines the phrase roll up as "to increase or acquire by successive accumulations." In the business world, a roll-up is a company built by the acquisition of several companies, especially a large public company built from the purchase of smaller private firms. Most of the major publicly traded auto dealerships, for example, have grown by buying up and consolidating smaller dealerships.

It Seemed Like a Good Idea at the Time

In the 1980s and 90s, roll-ups were a popular idea. Investors bought into the idea of combining growing companies with the expectation that centralizing certain office and administrative functions would create significant cost-savings. It was also expected that the entrepreneur owners of these small companies would work together in the consolidated company, sharing their knowledge and experience. The idea was that the whole would be greater than the sum of its parts. It looked like a good way to create a larger company, capable of competing in wider markets.

A Business Wire article from 1998 boldly stated, "Investors know that combining dozens or even hundreds of businesses in the same industry creates a lucrative financial opportunity and the potential for revolutionizing a whole industry." According to Venture Economics Information Services, quoted in the same 1998 article, roll-up industries posted a 63.5 percent return to investors from September 1996-1997.

Only one year later, however, a 1999 article published in Mergers & Acquisitions: The Dealmaker's Journal noted that many roll-up firms had fairly short lives, with a significant number being acquired themselves within three years after becoming publicly traded entities. The record for the briefest life was posted by LandCare USA Inc., which lasted only six months before agreeing to a $167.5 million deal with ServiceMaster Co.

A Difficult Task

Building the perfect roll-up simply didn't work out that well in reality. Merging two companies is an undertaking. Rapidly merging several quickly proved to require Herculean efforts. The harddriving entrepreneurs that built the component companies weren't always good at working for someone else, either. Sometimes they quit and formed competing companies, taking a percentage of their customers with them.

The investment interest in roll-ups also inflated the prices of small companies. Because roll-up companies were believed to be an efficient model, the investing public bought stock in them. This allowed the companies to spend more on acquisitions, allowing the smaller companies they purchased to demand higher prices. This created a ripple effect, as other companies in the same industry valued themselves at the artificially inflated selling price of their competitors.

Successes and Failures

Many of the roll-ups of the 80s and 90s were unsuccessful, and cost their investors millions of dollars. Howard, Lawson & Co., a Philadelphia investment bank that follows industry consolidators, commented in its 1999 Industry Consolidation Report that many roll-ups "have disappointed their early fans by failing to execute on the integration of the businesses they acquired." The report also noted that "many of the newly public consolidators have just not been able to deliver bottom-line growth on schedule."

Of course, not all roll-ups were failures. Ireland's CRH plc, for example, is an impressive success story. The company, which makes primary building materials and products for the construction industry, is an immense roll-up, built from the acquisitions of dozens of smaller, generally family-owned companies. CRH doubled its size between 1997 and 2000, and it's still growing - CRH spent nearly $100 million a month on acquisitions in the last year and a half. The company bought 25 businesses in the United States in 2001, a year in which M&A activity declined in most industries.

By consolidating operations in an otherwise fragmented industry, CRH has gained a considerable competitive advantage. The company controls 80 percent of the Irish building materials market. CRH's American holding company, Oldcastle, is the leading American producer of asphalt, and owns companies that are regional leaders in glass, brick, and precast products.

The fact that CRH is a conglomeration of smaller companies may be working in its favor. For all the company's size, it doesn't look big. It looks like a lot of small operations. CRH promotes this perception, using numerous public names and operating through subsidiaries. Critics of the company, in both Ireland and the U.S., claim that this tactic creates the illusion of competition in a market that the company has almost cornered.

Outlook

Despite some success stories, roll-ups are not always popular with the today's cautious investors. But now that small business valuations are no longer at the inflated levels seen in the '90s, it may just be the time to make a roll-up work. Today's roll-up, however, is likely to look a little different. Instead of trying to merge several companies into one, roll-up companies are exploring the benefits of operating several smaller operations from under a single corporate roof Large auto dealerships, for example, often own and operate several smaller dealerships, avoiding self-competition by representing multiple product lines and dealing in several geographical areas.