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A roll-up merger is the process of acquiring smaller companies within an industry to form one larger firm. To start a roll-up, investors purchase companies they believe complement each other or might realize greater economies of scale if combined. Oftentimes, the investors are private equity firms that specialize in a particular industry.

Roll-up mergers allow resources, employees and products to compete on a scale that is difficult or impossible without the assistance of the other firms in the roll-up. Ownership of the individual companies transfers to a holding company, and prior owners receive cash and shares in exchange for their businesses.

Other than being able to reduce marginal costs, businesses and products benefit from roll-ups through increased exposure; name recognition; access to new markets or demographics; and from the expertise of others within the industry. However, this process has its limits and investors must be careful to avoid becoming too large and experiencing diseconomies of scale.

To a certain point, larger firms tend to dominate individual markets because of their reputations, economies of scale and greater product offerings. When there is an absence of large players, the market is said to be "fragmented." This creates an opportunity for equity investors to perform consolidation among different individual businesses to increase productivity and bring efficiency to the market.

It may also be the case that a market is dominated by one player that is too large for any of its smaller competitors to challenge individually. A roll-up company, built from several smaller competitors, could bring competition on a scale that did not exist previously.

Despite all of the perceived benefits, roll-up mergers can be difficult to execute. Trying to combine different business cultures, infrastructures and consumer preferences can be complicated. If not executed properly, a lack of cohesion could compromise any proposed benefits.

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