Deal Rollatini

The process of rolling up acquisitions in a fragmented industry is pretty standard stuff these days. But it’s still worth looking at the topic because there are so many variables within the “sameness” of fragmentation that can go wrong.

One of the major potholes you can hit in rolling up smaller acquisitions is sourcing.  No, not your own sourcing; your customers sourcing you! And if you don’t Getting Flattenedpay attention to that issue, your robust roll-up can get flattened.

Here’s the scenario: Say you’re a private equity investor looking to launch a consolidation play.  You make an investment in a fragmented industry, with the seed acquisition that has all the right attributes including a cornerstone customer, say, a Honeywell or a GE with locations and opportunities all over the map.  Your aspiration is to consolidate the industry and grow that customer into an enormous national account.  Good concept.

Bad reality.

Customers that source products or services from a highly fragmented industry have built up buying practices to mirror the availability of supply.  All of their sourcing processes and sourcing infrastructure are based on purchasing from myriad local vendors.

So if your investment thesis is predicated on reshaping the long-standing business practices of a customer, The Merger Verger predicts that you will be in for some rough going.

It is one thing to do a deal and change the culture of the acquired organization; you own it.  But changing a customer’s culture is quite another thing.  So we strongly recommend that you not base your deal economics on changing any deeply entrenched buying patterns of your customers, however brilliant you think your new offering might be. You could be betting the farm on someone else’s willingness to change.  Never a good strategy.

Reward:

Deal Rollatini in the Works

Deal Rollatini in the Works

If the title of this posting inadvertently led you here in search of Italian food, The Merger Verger appreciates your reading all the way to the end.  Your reward is here: Veal Rollatini with Marsala Sauce.  (Our only suggestion might be to add some fresh ricotta to the mix.)  Let us know what you think.

Chick ‘n Roll-Up

Rolling up fragmented industries is an age-old strategy. Sometimes it works.  And sometimes better than others.

The Merger Verger was involved once in leading a series of roll-ups in the industrial packaging and crating space.  Chick Packaging (now a part of the Swedish global packaging concern, Nefab) began life in 18-something in rural New Hampshire and grew through acquisitions to be the largest industrial packaging company in the US.  While the strategy was highly successful, it never achieved one of the its fundamental underpinnings. 

The cornerstone business – and in fact most of the bolt-ons – had deep customer relationships with one or more of the Fortune 100.  The roll-up strategy called for leveraging those relationships into national contracts as the operational footprint of the company grew.  It didn’t happen, not to anywhere near the degree it seemed like it should have.

The reason offers a cautionary tale for anyone contemplating a consolidation strategy.

The Chick Map

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