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Roll-Ups are the Rage

About 90 “roll-ups” have gone public since the first one in 1994, including 50 in 1997, according to CFO Magazine (April, 1998).

Now a frenzy, as many as five a week are coming to market. A merchant banker friend refers to roll-ups as the “Deal du jour.”

A roll-up happens when a promoter finds five to ten private companies in a fragmented industry that agree to sell for cash and stock when the company goes public. “Roll-ups have popped up in every fragmented industry,” the magazine reports.

While pointing to several success stories like U.S. Office Products and Coach USA (a motor coach company roll-up), the article warns that “roll-ups can be a house of cards.” Several roll-ups have lost 60-80% of their value since going public less than two years ago. Too often, roll-up CEOs have financial but not managerial skills. Since roll-ups’ growth strategy depends on further consolidation, their success is limited to the availability of good acquisition candidates. The magazine also quotes Wharton assistant professor Geoffrey Brooks, ”Fueling growth by buying companies with lower P/E ratios has long been discredited as a strategy with no rationale...It’s a greater-fool theory. At some point it has to stop, and someone is left holding the bag.” The financial engineers who do the deals, however, clean up by charging fees that are about 50% higher than normal for IPOs and by taking a large equity stake for a very small upfront investment.

Even the roll-up pointed out as the best of breed, U.S. Office Products,is showing weakness. From its offering price of $7.50 In early 1995, the stock rose to $27 in mid-1996 but now trades in the mid-to-upper teens. Promised economies were never realized as little integration was accomplished. Gross profits as a percent of revenues has declined. Losing strategic focus, the company made acquisitions in not one, but six, industries. Now the company has spun off several businesses.

Roll-ups depend on the value of stock used to acquire additional businesses. The risks of pell-mell acquisition and realizing the efficiencies of consolidation are magnified by market risk. The roll-up craze has known nothing but the booming stock market of the past few years. How these financial vehicles will do in unfriendly markets is another risky unknown.

Many of our readers will be offered opportunities to participate in roll-up strategies. We urge very careful consideration both of the specific deal and of whether the concept will live up to its promises.




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