Roll-Up Merger: Overview, Benefits and Examples

What Is a Roll-Up Merger?

A roll-up merger is when an investor, such as a private equity firm, buys up companies in the same market and merges them together. Roll-up mergers, also known as a "roll up" or a "rollup," combine multiple small companies into a larger entity that is better positioned to enjoy economies of scale. Private equity firms use roll-up mergers to rationalize competition in crowded and/or fragmented markets and to combine companies with complementary capabilities into a full-service business, for instance, an oil exploration company can be combined with a drilling company and a refiner.

Roll-Up Merger Processes

Roll-ups are a part of the consolidation process that occurs as new market sectors mature. Combined companies can provide more products and/or services than a smaller, independent player. Combined companies can also expand their geographic coverage and enjoy the economies of scale and greater name recognition that size confers. Larger companies are usually valued at a higher multiple of earnings than are smaller companies, so a private equity firm that has bought and integrated smaller businesses can sell the rolled-up firm at a profit or execute an initial public offering (IPO).

When a roll-up merger is executed, owners of the individual companies receive cash and shares in exchange for their ownership stakes. The companies are then transferred to a holding company. Other than a reduction in marginal costs, companies combined in a roll-up merger can garner better name recognition, achieve increased exposure, and gain access to new markets or new or underserved demographics. Such merged entities can also benefit from better access to expertise within the industry.

Roll-Up Merger: Keys to Success

Roll-up mergers can be difficult to pull off. Combining several businesses and their differing cultures, infrastructure and consumer bases is a complicated job. If not done properly, the post-merger entity may not achieve the desired efficiencies, scale or profitability. Generally, successful roll-up mergers share these traits:

  • They target large but highly fragmented industries lacking a dominant player.
  • The consolidators have a proven process that creates value.
  • The consolidators have a proven game plan for identifying targets, evaluating them, and then integrating them.

Roll-Up Merger Scenarios

The reality of most marketplaces is that large companies tend to dominate. Their breadth product offerings, economies of scale and brand awareness equate to a dominant position. When a marketplace lacks big players, it is said to be "fragmented." Such fragmentation presents an opportunity for investors to consolidate the existing smaller businesses by way of a roll-up merger. In such a roll-up, redundancies inherent to combining so many companies are eliminated, productivity is raised and higher profits can be generated due to greater efficiency.

Marketplaces can also be dominated by a single company that is too large to challenge by one of its smaller competitors alone. In such a case a roll-up merger can be utilized to combine several smaller competitors into a larger company that compete on equal terms.

A prime example of a roll-up merger is Waste Management, Inc., which was formed in 1968 to combine over 100 smaller, local trash haulers. It went public in 1971 and by 1982 became the largest waste hauler in the United States.

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