Over the last several months, we’ve talked to numerous businesses contemplating roll-up strategies. These businesses represent a wide cross section of industries ranging from industrial manufacturing, financial services, and medical services to IT software and services. We expect add-on and roll-up activity to be a large piece of the overall M&A pie in 2020 and 2021.
While not every private equity backed platform is a “roll-up”, an integral part of how private equity adds value to their platform investments is to help drive “add-on” acquisitions. And yes, the cash war chest in PE continues to build, so capital is abundant for the right opportunities.
This leads us to share a few high-level observations regarding what are the key ingredients to execute a successful roll-up strategy.
1. The most successful roll-ups target large, yet highly fragmented industries with no real dominant players. Interestingly, often times these emerging market opportunities result from new and increasingly onerous government regulations as illustrated by the following examples.
For instance, the FDA’s passing of The Drug Quality and Safety Act, which now mandates requirements for drug serialization and track and trace, has spawned an entirely new market opportunity and ecosystem of players. This market is maturing rapidly and will likely see several financial and strategic roll-up entrants, so stay tuned and/or let me know your take.
Another example is the increased contamination control testing regulations that followed the deaths of several Framingham-based New England Compounding Center clients due to meningitis infections. The increasingly onerous compliance requirements that followed this travesty created a significant market opportunity for a dominant player to roll-up the highly fragmented and regionally focused contamination control services industry.
2. The consolidator needs to have a proven operational formula that can be applied to acquired companies in order to create value. Simply put, how do you drive more meaningful growth and profitability than those acquired companies have been able to do so independently? There’s been much research demonstrating that the best acquirers are those that do a volume of deals, and the “operational formula”, along with the organizational discipline that comes with experience, is a key factor in their success.
3. The platform needs a disciplined and proven approach to finding, evaluating and integrating targets. Being a disciplined buyer is easier said than done but can be boiled down to FOCUS. Getting roll-ups right boils down to finding the right industry dynamics and market opportunity; developing, testing and perfecting the right operating plan; and finally, bringing a disciplined and focused approach to finding, evaluating and integrating targets.