Why You May Want to Reconsider Your Industry Roll-up Strategy

May 09, 2024

by an investor from Harvard University - Harvard Business School in Toronto, ON, Canada

Pursuing a Roll-up strategy can be a wonderful opportunity for personal fulfillment and financial success under the right circumstances. However, the data is overwhelmingly clear: Consolidation strategies are much harder to execute than they are to dream up.

Though I’m not against consolidation theses in and of themselves, I do find myself more skeptical than most when presented with one. In today’s blog post, I attempt to explain why.

You'll see why I encourage all prospective consolidators to be deeply thoughtful about their personal motivations, the stand-alone size and attractiveness of their platform company, their bandwidth constraints, whether their investment thesis features any "single-point-of-failure" risk, how many acquisitions they think they ought to do (and why), their financing structure, the incentives created by that financing structure, and the specific returns to scale in their industry beyond absolute size.

Link to the article is here, please enjoy!: Why You May Want to Reconsider Your Industry Roll-up Strategy

Reply by a searcher
from INSEAD in San Francisco, CA, USA

"...50% – 80% of all M&A deals fail to achieve their intended goals or end up destroying shareholder value...any aspiring consolidator ought to ask themselves what they are likely to get right that 50%-80% of their better financed and more experienced peers apparently got wrong."

While I don't necessarily agree with the more experienced / better financed part since many searchers come from an M&A background, the law of averages is compelling.

Regarding the single point of failure risk, I was listening to an acquiring minds podcast the other day that talked through a rollup where each individual company had its own president which took their own personal guarantee which was then under the larger corporate umbrella. Could be an interesting way to spread the risk, but I'm not sure I'd be down be a president and use my company's P&L to offset others losses.

Reply by a searcher
from University of Southern California in Los Angeles, CA, USA

Interesting read. You raise a good question: why would someone want to pursue a roll-up? What’s the motivation behind it? Is it driven by ego, or maybe it just sounds exciting? Running one business is challenging enough, let alone coordinating and managing several at once. That said, you can’t blame people for dreaming big!

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