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A Rollup (also "Roll-up" or "Roll up") is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged. The principal aim of a rollup is to reduce costs through economies of scale. It also has the effect of increasing the valuation multiples the business can command as it acquires greater scale. Rollups may also have the effect of rationalizing competition in crowded and fragmented markets, where there are often many small participants but room for only a few to succeed.
An investor faced with an opportunity to invest in two competing companies may reduce risk by simply investing in both and merging them. Rollups are often part of the shakeout and consolidation process during an economic downturn or as new market sectors begin to mature.
Rollups of complementary or unrelated companies are also done to:
- Build a full-capability company, when it would be too costly or time consuming to develop the missing pieces through internal expansion.
- Blending companies have different financial metrics, often to make the combined company attractive for investment, mergers and acquisitions, or an initial public offering.
Kraft Foods (now renamed Mondelēz International) was an early example of a rollup, in the dairy industry. Waste Management was the most notable rollup during the 1970s and 1980s. Waste Management's acquisition of 133 small-time haulers quickly became the largest waste disposal company in the US. The characteristics that can make a rollup attractive are: there are many small players in fragmented markets or: where technology can play a role in revitalizing industries with small margins but technology can impact growth and profits. AutoNation was also a successful rollup effort in the car dealership space spearheaded by Wayne Huizenga, founder of Waste Management. The other reason companies do rollups is due to the higher earnings multiple achievable in businesses with large scale relative to smaller mom and pop operations which remain vulnerable to changing markets and poor access to capital markets. A recent rollup is Valeant Pharmaceuticals International that used more than $30 billion to acquire over 100 companies.
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