Roll-Up Merger: Definition & How It Works

Ketan is an investment banker while his friend Nitin is a novice in financial things. Nitin is planning to open a trading account and is counting on his knowledgeable friend to teach him about trading and other share market basics.

At one point in their conversation, the topic ventured around mergers and acquisitions and how global advertising agencies were using roll-up mergers to consolidate and become competitive. Nitin was taken aback as this was a completely new term for him.

Nitin – I have heard of mergers, acquisitions and rolled-up sleeves, but what is this is roll-up merger? I hope I’ve heard it right.

Ketan – (with a smile) No, it’s bigger than just rolling up your sleeves. In fact, a roll-up merger is a process where a large company acquires smaller companies in the same industry for competitive advantage. Let me explain with an example.

Imagine that ABC Company manufactures acrylic paints and once enjoyed a considerable market share. However, a few years ago many small manufacturers had started manufacturing acrylic paints because they saw an opportunity in this sector. As a result, though ABC is still a market leader, it is seeing a dip in sales and revenue, and losing market share to its smaller rivals.

Thus, ABC Company plans to acquire or buy multiple acrylic paint manufacturing companies to combine resources, cut down costs, and increase revenue and profit. So, they raise capital from the market and acquire these companies through a roll-up strategy. These types of mergers are known as roll-up mergers.

Nitin – But do I have to know all this before I start trading or investing?

Ketan – Whether you intend to become a long-term value investor or an intraday trader, knowing about these business terms will help you carry out proper fundamental analysis. As you move beyond learning share market basics and start handling a trading account, this knowledge will help you analyze stocks properly, and trade and invest with confidence.

Nitin – Thanks brother! I really appreciate it.

Ketan – Hey, the pleasure is mine! I love explaining these financial terminologies.

Roll-Up Strategy in Motion


Roll-Up Merger: Definition & How It Works

Nitin – Ketan, can you recall any recent roll-up mergers in India worth mentioning as an example?

Ketan – Ok. Let me recall those that come to my mind.

Yes. Reliance Industries alone made a total of 8 acquisitions in 2019. The company acquired small start-up brands such as Fynd, Haptik, C-Square, Reverie Language Technologies, Sankhya Sutra Labs and more.

Nitin – Wow! 8 acquisitions in a single year, that’s impressive!

Ketan – It really is. Until November 2019, there were a total of 86 acquisition deals in India.

Roll-Up Merger: Definition & How It Works

Nitin – So, how does this work? I mean, what are the steps?

Ketan – Good question.

Well, initially, the company that wants to acquire or roll-up other smaller companies forms a dedicated merger and acquisition team. In fact, most large corporations have an in-house M&A team in place that is always on the lookout for a valuable ‘fish in the ocean,’ so to say.

M&A teams are skilled in developing winning roll-up strategies and formulas with advanced financial modelling and valuation analysis. They are also very good at negotiations. So, once the smaller company is identified, the negotiation begins and if a mutual agreeable amount and conditions are met, the deal is closed.

Nitin – Interesting!

Ketan – Remember, a roll-up merger is only called one when it happens within the same industry. For instance, if you are in the telecommunication industry but you are acquiring a media house for diversification; that is technically not a roll-up strategy.

Nitin – Are there any challenges or risks in roll-up mergers?

Ketan – There’s got to be one because you are bringing multiple businesses into one basket. Even businesses in the same industry have their own identity, work culture and character. When you try to amalgamate this diversity into one company, it throws up a lot of challenges.

Nitin – Apart, from the company’s M&A team, who are the people responsible for seeing through a roll-up merger?

Ketan – Firstly, let me tell you that you are very attentive and a fast learner. The fact that you are asking the right questions proves that. I think you will master the share market basics in no time and will be ready for trading in a few weeks.

Nitin – Really? Do you think so? Thanks for your encouragement, man!

Ketan – Keep it up! To answer your last question, companies, whether they have a dedicated M&A team or not, may hire an investment banker like me to chalk out a winning roll-up strategy. We, investment bankers, are in the know about a lot of happenings in the market and about businesses, so our expertise helps them in the merger process.

Nitin – Ketan, this was really interesting, stimulating and enlightening. Thanks again for sharing your knowledge.