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What is Roll Up Merger And How It Works

04 Aug 2023

Introduction

Mergers & Acquisitions are a strategic expansion process that conglomerates often undergo to tap economies of scale and increase market share. Roll-up mergers are one such kind, where a company acquires various small or fragmented companies to consolidate its business operations. Let's understand the concept with the help of an example: 

An automobile company is planning to reduce operational costs and increase market share in the electric vehicle segment. Hence, instead of investing heavily in starting a new division within the company, it will look out for smaller automobile and ancillary companies that either manufacture automobile-related products or are in the business of developing innovative electric vehicles. This gives the company a head start, and it is not burdened with finding new resources and a talent pool to run the new division.

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How is a Roll-Up Merger Concluded?

There are two key stakeholders in the merger process: the external bodies like investment banks and merchant banks that help in carrying out the merger, and the dedicated M&A team of the company actively looking for the "fish in the sea". Once the company has decided to initiate the acquisition phase and the board has approved such acquisitions, the next step is to get regulatory approvals from SEBI, NCLT, and the Competition Commission of India. On getting the regulatory approvals, the assets and liabilities, along with the workforce and other essentials, are transferred to the holding company, and the deal is closed.

What are the Challenges Pertaining to a Roll-Up Merger? 

Roll-Up mergers are a great way to expand your business; however, they are not always smooth. When acquiring a company, the acquirer is bringing the culture, people, and operations of a company to its own. More often, companies face challenges in integrating the work ethic of the merged entity and establishing a culture that both sides of the party embark on. Moreover, mergers and acquisitions are highly dependent on analyst forecasts, which may not be realized well in all cases. 

Apart from consolidation of operations, creating synergies is also challenging. Holding companies have to ensure that said synergies and targets are met so that the cost-benefit analysis holds good and the acquirer is not losing, if not gaining, from the acquisition.

Conclusion 

In the context of mergers and acquisitions, roll-up mergers are an acquisition strategy. It involves combining multiple smaller companies within the same industry or sector to create a larger, more consolidated entity.
Roll-up mergers are often utilized in industries with numerous small players, such as retail, technology, or financial services. They can provide benefits to both the acquirer and the target companies, including increased market presence, economies of scale, access to new markets, and potential exit opportunities for the smaller business owners.

 

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