For companies with an established market presence who want to grow quickly, the strategy of ‘roll-ups’ has emerged as a powerful force reshaping M&A.  

A roll-up is a growth strategy where a private equity firm or venture capital group invests in consolidating two or (many) more companies – often referred to as ‘bolt-on acquisitions.’ The roll-up operator then works to streamline operations, reduce duplicative costs and implement best practices across each business. The goal behind taking dozens, hundreds or even thousands of smaller companies and combining them into one large organisation is to increase purchasing power, create greater brand recognition, lower capital costs and create more effective advertising, along with increasing customer acquisition (typically where sales cycles in an existing market are expensive and/or expensive) and product acquisition (when in-house development is long and expensive).  

Indeed, a study conducted by McKinsey over the course of two decades into successful M&A advocates roll-up strategies as overall generating more value than focusing on one eye-catching ‘big bang’ transaction It’s an extension of the Warren Buffett philosophy of eschewing the “earth-shattering” and instead “doing a lot of small things right.”  

However, as companies embark on ambitious acquisition sprees, success increasingly hinges on a revised approach to the way these acquisitions are integrated and consumed. 

The Evolution of Roll-Ups 

Roll-ups have a rich history dating back to the beginnings of modern commerce. The 19th century era of the robber barons saw men like Andrew Carnegie consolidating heavy industry and John D. Rockefeller aggregating the oil industry, while James Buchanan Duke bought so many manufacturers at one point he was controlling 80% of the tobacco business in the US. Kraft Foods (created in 1923 and now known as Mondelez International) was an important roll-up in the food industry, while Waste Management is considered the most notable roll-up of the 1970s and 80s.  

However, the prevalence and significance of roll-ups have surged in recent years, fuelled by a confluence of factors including globalisation, technological advancements and changing market dynamics. 

In industries characterised by fragmentation and intense competition with no clear industry leader, roll-ups can offer a strategic avenue for companies to scale rapidly, penetrate new markets and strengthen their competitive position. Moreover, low interest rates and readily available capital have facilitated the financing of acquisition-driven growth strategies, further catalysing the proliferation of roll-ups. 

The Pitfalls of Traditional Approaches 

Traditionally, the success of roll-ups was measured by the sheer number of acquisitions and the resulting increase in revenue or market share. However, this somewhat simplistic approach fails to account for the complexities inherent in integrating diverse businesses with distinct cultures, operations and technologies. Many roll-ups have faltered due to inadequate integration planning, cultural clashes and a failure to realise synergies. Moreover, the relentless pursuit of acquisitions without a cohesive strategy can lead to overextension, dilution of focus and erosion of shareholder value. 

Indeed, a 2008 Harvard Business Review recommended against pursuing roll-ups entirely, noting that (at the time) more than two-thirds of roll-ups failed to create any value for investors. Often roll-ups cannot sustain their fast rate of acquisition. In the beginning, all that matters is growth—but buying multiple companies a month comes with numerous cultural and operational issues that accompany a takeover. However, while operational challenges may surface relatively swiftly, uncovering cultural disparities often requires more time, potentially leading to a gradual erosion of investor value if these issues are left untreated and compound over time. 

Plus, because investors know profitability is hard to decipher at this early stage, they focus on revenue; while executives know they don’t have to worry about consistent profitability until the roll-up reaches a relatively steady state. Thus operating costs frequently balloon. Worse, knowing that the company is in buying mode, sellers demand steeper prices. 

HRB also notes roll-up strategies often fail to account for tough times, calling roll-ups a financial high-wire act. If companies are purchased with stock, the share price must stay up to keep the acquisitions going; if purchased with cash, debt piles up. As a small decline in the market can be catastrophic, one must know exactly how big a hit can be withstood. If financing with debt, what will happen if there is a 10%—or 20% or 50%—decline in cash flow for two years? If buying with stock, what if the stock price drops by 50%? Similarly, both HRB and DealRoom highlight the catastrophic effects of choosing the wrong market which doesn’t have benefits to scale. 

A Revised Approach: Beyond Acquisition 

To thrive in the era of roll-ups, companies must adopt a more nuanced and strategic approach to acquisitions. Success no longer hinges solely on the act of buying but rather on the ability to effectively integrate and extract value from acquired entities.  

Some preliminary considerations include: 

Strategic Fit: Prioritise acquisitions that align with the overarching strategic objectives of the roll-up entity. Assess target companies not only based on financial metrics but also on cultural compatibility, technological synergies and market positioning. 

Holistic Integration: Viewing integration as a continuous process rather than a one-time event is crucial. Develop a comprehensive integration plan that encompasses organisational structure, technology infrastructure, operational processes and human capital. Effective communication and collaboration across all levels of the organisation are paramount to smooth integration. 

Cultural Alignment: Recognise the importance of cultural alignment in the success of roll-ups. Invest in fostering a unified organisational culture that respects the unique identities of acquired entities while promoting a shared vision and values. 

Synergy Realisation: Identify and leverage synergies across the integrated organisation to drive operational efficiencies, reduce costs and enhance value creation. This may involve streamlining redundant functions, consolidating supply chains or cross-selling products and services. 

Long-Term Sustainability: Maintain a long-term perspective and resist the temptation to pursue growth at any cost. Focus on sustainable value creation, prudent capital allocation and maintaining financial discipline to ensure the resilience and longevity of the roll-up entity. 

Autonomy as a Strategic Dial 

Traditional wisdom dictates that post-acquisition integration involves the absorption of key assets and capabilities of the acquired company into the acquiring firm, often leading to a reduction in the acquired company’s autonomy. However, a groundbreaking study by Professor Thomas Lawton at University College Cork, and international colleagues, sheds new light on this conventional approach. 

Lawton’s research, focusing on the acquisition of Lamborghini by Audi—a case of a failing company undergoing a remarkable turnaround—challenges the notion that integration should necessarily lead to a loss of autonomy for the acquired entity. Despite Lamborghini’s troubled history of underperformance and bankruptcy, its acquisition by Audi resulted in a sustained recovery while preserving its unique identity—a rarity in the world of M&A. 

The study, recently published in California Management Review (May 2024), reveals a dynamic framework for managing acquired subsidiaries, emphasising the strategic dial of autonomy. Rather than adhering to a static approach to post-acquisition integration, where autonomy is either fully retained or entirely relinquished, Lawton proposes a model wherein autonomy levels can be dynamically adjusted over time. This allows for ongoing negotiations between parent and subsidiary managers, leading to fluctuations in autonomy levels while maintaining a harmonious balance. 

Three Managerial Levers 

The dynamic interplay between autonomy and integration proved instrumental in Lamborghini’s resurgence. Despite initial phases of robust integration, the subsidiary gradually regained autonomy, leveraging its distinctive resources and capabilities to contribute to the parent company’s success. 

Importantly, this approach to autonomy management extended beyond the boundaries of the acquired company. Lamborghini’s collaborations with partners within and beyond its supply chain underscored the broader ecosystem approach enabled by its autonomy. 

Central to this dynamic approach are three managerial levers: appraisal respect, organisational identity, and resource orchestration. These levers facilitate ongoing bargaining between parent and subsidiary managers, leading to oscillations in the level of subsidiary autonomy. By staying within a harmonious domain—where autonomy and integration are balanced—companies can achieve continuous strategic renewal and sustained competitive advantage. 

Implications for Roll-Ups 

The implications of this research are profound for companies pursuing roll-up strategies. Instead of viewing integration as a one-time event aimed at assimilating acquired entities into the parent company, organisations are encouraged to embrace a more fluid and adaptive approach. This approach allows for the renewal of distinctive resources and capabilities within acquired subsidiaries, ultimately driving long-term success. 

Furthermore, Lawton’s study underscores the importance of speed of integration as a driver of M&A success. Rather than rushing to impose integration measures, companies should adopt a flexible timeline that accommodates the evolving needs and dynamics of acquired subsidiaries. 

This research offers a paradigm shift in the management of post-acquisition integration, advocating for a balance between autonomy and integration as a catalyst for sustained growth. By reimagining the role of autonomy within the acquirer-subsidiary relationship, companies can unlock new avenues for innovation, collaboration and competitive advantage in an increasingly complex business landscape. 

Recommendations for Leaders 

Overall, leadership teams should ensure that each acquisition aligns with the overarching strategic objectives of the roll-up entity. This requires a comprehensive understanding of the market landscape, competitive dynamics and long-term growth opportunities. Leaders need to oversee the development of a comprehensive integration plan that goes beyond financial metrics to encompass organisational structure, technology infrastructure, operational processes and human capital. Effective communication and collaboration are essential to ensure smooth integration across all levels of the organisation. 

HR teams also play a crucial role in facilitating cultural integration and alignment between the acquiring company and the acquired entities. This involves fostering a unified organisational culture that respects the unique identities of each acquired entity while promoting a shared vision and values. Managing cultural change and mitigating resistance to integration require effective change management strategies, thus HR teams must engage employees, communicate transparently and provide support throughout the integration process. 

It’s important to remember acquisitions can disrupt existing talent structures and lead to uncertainty among employees. HR teams should implement strategies to retain key talent within the acquired entities, including career development opportunities, incentive programs and transparent communication about the future direction of the organisation. Assessing the skills and capabilities of employees across the integrated organisation is essential for identifying synergies and maximizing operational efficiencies. HR teams can facilitate skill alignment through training programs, cross-functional collaboration and talent mobility initiatives. 

Finally, leadership teams should embrace a dynamic approach to autonomy management, as highlighted in the research by Thomas Lawton. This will likely involve ongoing negotiations between parent and subsidiary managers to adjust autonomy levels over time, balancing the need for strategic integration with the preservation of organisational identity and innovation. Effective decision-making within the roll-up entity requires a nuanced understanding of the trade-offs between autonomy and integration. Leadership teams must weigh the benefits of centralisation against the need for autonomy, considering factors such as market dynamics, competitive pressures and long-term sustainability.