A:

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.

RELATED FAQS
  1. What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become ... Read Answer >>
  2. What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and ... Read Answer >>
  3. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
  4. How does a merger affect the shareholders?

    Explore the effect of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  5. In M&A how does an all-stock or all-cash deal affect the equity of the buying company? ...

    Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern ... Read Answer >>
  6. Why would a company do a reverse merger instead of an IPO?

    Reverse mergers are often the most expedient and cost-efficient way for private companies that hold shares that are not available ... Read Answer >>
Related Articles
  1. Financial Advisor

    Defensive Investing: Learn from a Hedge Fund Pro

    Looking for ideas on companies, sectors or investments to short? Consider the opinion of this hedge fund luminary.
  2. Small Business

    What Are The Differences Between Internal And External Economies Of Scale?

    Internal economies of scale are firm specific. External economies of scale occur due to large changes outside of a firm that usually impact an entire industry.
  3. Investing

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  4. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller. We tell you what to look for.
  5. Insights

    Understanding Diseconomies of Scale

    Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output.
  6. Small Business

    What Merger And Acquisition Firms Do

    The merger or acquisition process can be intimidating. This is why merger and acquisition firms step in to facilitate the process.
  7. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.
  8. Investing

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
RELATED TERMS
  1. Roll-Up Merger

    A rollup (also known as a "roll up" or a "roll-up") is when when ...
  2. Options Roll Up

    The move from one option position to another that has a higher ...
  3. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  4. Merger Of Equals

    The combination of two firms of about the same size to form a ...
  5. Minimum Efficient Scale

    The smallest amount of production a company can achieve while ...
  6. Merger Mania

    A period of time with significant merger and acquisition activity ...
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  6. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
Trading Center