Many small companies around the world are working hard to deal with various challenges. It is no secret that many of them are struggling to compete with bigger companies. Let’s have a look at a roll up strategy, and why it makes sense to use this strategy.
Interestingly, a roll up strategy is the process of acquiring as well as merging multiple smaller companies in the same industry as well as consolidating them into a large company. Combining small firms into a larger company allows the latter to pull their resources together and there are other benefits as well. It is possible to reduce operational costs and to increase revenues.
Furthermore, the consolidated company can expand its geographic reach to include markets served by the smaller companies. This is not the end of the story as it can also offer a broader range of products and services than a single, smaller company. Thus, investors, as well as shareholders, enjoy the benefits of a large pool of investments.
An example of a roll up strategy
As can be seen from the information stated above, a roll up strategy offers many advantages. Le’s have a look at a practical example to learn more about a roll up strategy. For example, the Company XYZ assembles equipment for the computers in North America. Recently, XYZ experienced growth in revenues, but its operational costs continued to increase since it sources some accessories used in computer assembly from other companies.
It is worth noting that, company XYZ plans to expand its operations by acquiring two small firms. This way XYZ will be able to manufacture some of the components it uses in its core operations.
Importantly, to support the roll-up strategy, XYZ borrows $1.2 million. Company XYZ uses the funds to acquire the two smaller companies, Company ABC and Company JKL. Interestingly, Company ABC deals in RAM chips manufacturing. It is an essential component that Company XYZ uses in computer assembly and its annual revenues average $300,000. Interestingly, Company XYZ agreed to pay $450,000 for Company ABC.
Let’s have a look at another target as well. The Company JKL deals in the distribution of computer accessories. Importantly, the Company JKL’s revenues average $550,000. People should keep in mind that, it also operates in Europe as well as Southeast Asia. Interestingly, XYZ and JKL agree on an acquisition price of $600,000.
A Roll up strategy and its benefits
It is worth noting that, companies that use a roll up strategy in their expansion plans enjoy various benefits. There are several major benefits such as economies of scale, cross-selling, as well as a multiple arbitrage. As a reminder, Company XYZ needed to outsource RAM chips since they are part of the components used in computer assembly. Moreover, it needed to depend on other distribution channels to supply its final assembled computers.
However, after acquiring Companies ABC and JKL, XYZ has the opportunity to reduce costs that it previously incurred sourcing RAM chips and distributing its products in the market. It means by leveraging economies of scale, the company has the ability to reduce production costs and to increase its revenues.
Moreover, Company XYZ will now enjoy selling a wider range of products, including RAM chips, etc. As a reminder, cross-selling gives the acquirer a competitive edge compared to other competitors that sell assembled computers only.
Last but not least, multiple arbitrage is the process of increasing the company’s value without conducting any operational improvements. Interestingly, acquiring smaller companies brings about the aggregation of resources and revenues, which adds more value to the company. Thanks to a roll up strategy, it is possible to reach good results.