Back in March, I was asked: “so what do you think of roll-up strategies?” The asker was contemplating such a strategy and shared that he now has access to a sizeable pot of private equity cash.
It got me thinking about my own experience of having been part of the very same business strategy about 15 years ago. I considered the key question “what does it take to successfully pull off a roll-up merger strategy and presumably exit with substantially more capital than you started with (while having a healthy return on that capital)?”
Here are my thoughts:
Perhaps obvious, but start with the end in mind; with a set of exit parameters against which you can continuously evaluate new acquisition opportunities or exit opportunities. Just because classical private equity money tries to exit in 3-5 years doesn’t always make that an optimal timeframe. I recently saw a private equity play wait over 15 years for their exit and achieve a very impressive return. That’s the exception, but you get the point; be flexible on certain business parameters.
The availability of significant cash is not an excuse to overpay for an enterprise, nor to buy a business for which little or no improvement in operating results can be obtained. For a striking example, read the Saturday, March 24th story in the business section of the Globe and Mail titled, “how a Bay Street all-star team flopped”. They had significant capital to invest but under time duress, made little progress and several rookie mistakes.
Depending on how many smaller businesses are being merged (or rolled-up), significant effort and resource must be put into the operational aspects of the merger(s). Strengths have to be shared and enhanced and weaknesses ruthlessly found and eliminated. The merged business, now professionally run (after a usually short period of post-acquisition operation by the previous owner) may have trouble replicating the successful market strategy employed by a leaner, fast-moving founding owner. Leveraging and sharing the various business strengths of merged enterprises requires a strong, experienced, and sure-footed executive team.
It seems to me that the time required to effect the merger(s) and build on the strengths is often underestimated. Market conditions are always changing, key acquired management talent may not stay on, and finding more to fix and change than expected (due diligence can’t possibly find everything) often makes for slower progress than hoped for. This new business, now rebranded and eager to grow, has to get traction with customers who may have been wondering what to expect. Purchase by a new owner has left customers talking to alternate suppliers as a backup should they be disappointed by the new ownership. Smart competition always tries to take advantage of any ownership change which implies a change in business focus and strategy.
The improved business results (growth and financial) have to be sustained long enough to create conditions for an enterprise sale and capital exit. One year of results is rarely enough to impress potential buyers unless there are exceptional circumstances (think unique IP or monopoly licensing). Again, market conditions may mess up the ideal timing to demonstrate the improved value of the rolled-up businesses. Ensuring financial backing is patient is key to getting several years of sustained positive results to put on display.
There have been a number of well documented and successful roll-up merger strategies (an example would be Waste Management created in 1968 from numerous small, local waste handling businesses which by 1982 was the largest waste hauler in the United States). Others, not so successful are usually also not well known. Their failure led to their disappearance and the loss of significant invested capital.
My own experience saw the steep recession of 2008 disrupt a broad-based roll-up strategy such that the many businesses now are either back in the hands of previous owners (price unknown) or broken up and acquired by better-situated market players.
It appears that substantial capital, a good plan, extraordinary execution and flexible timing are all necessary to a successfully roll-up strategy. So, the answer to my March questioner is yes, maybe … and try to have your share of good luck.