22 Sep Using Reverse Mergers for Industry Consolidation and “Roll Ups”
The reasons for performing a reverse merger are wide and varied. Each individual situation is unique and typically requires an in depth understanding of the underlying goals of the company in question as well as the pitfalls and risks associated with any course of action relative to the business. In many instances, going public is not the right answer. However, in certain situations, going public is the very best move for maximizing shareholder value. To be specific, going public is ideal in large dispersed industries where consolidation is present and where industry roll-up opportunities exist. Many a financial engineer has made their fortune by effectively executing an industry roll-up strategy.
Platforms & Consolidation
When industries begin consolidating, financial experts often take a single, larger company, and acquire it. This company is then used as the “platform” company on which other acquired firms are bolted-on. These “bolt-on” acquisitions help to add to the revenue and bottom-line profits of the main parent company that continues to grow inorganically through industry acquisition and consolidation.
There are many successful (and failed) examples at this strategy. Successful roll-ups typically require opportunities for waste reduction and cost cutting, a large market with many diverse players and–most importantly–savvy managers with in-depth industry connections. The growing platform company will greatly benefit from power over buyers and suppliers. The acquiring firm may also acquire key talent, strategic intellectual property or key contracts and customers. It’s the ultimate build vs. buy scenario where in our case, acquisition (buy) is the key strategy. In addition, larger firms will be better scaled and often more efficiently operated by experienced management at the helm.
Consolidation is not just limited to vertical integration, meaning acquisition of firms that are in the same market niche. In fact, some firms have often blended companies together, integrating and acquiring across the value-chain to create a diverse set of businesses. This can help to diversify the risk of being too pigeonholed into one area of the market, but it also carries its own risks which typically involve the complexity and management of the entire value chain. Running a diverse set of businesses is not easy and requires tacit knowledge in several markets.
Successful growth has been executed using these and other creative methods for growing via acquisition.
How Reverse Mergers Plays a Roll-up Role
Reverse mergers have frequently played a key role in industry consolidation and roll-ups. Here are a few reasons they are used:
- They’re cheaper. When cash is a limited resource is needed for growth by acquisition, saving money is of keen importance. Performing a reverse merger via a public shell is a way to gain access to the public markets in a more expensive way than doing an full-blown IPO. This is of particular importance if the chosen platform company’s EBITDA isn’t massive and the firm doesn’t necessarily need to raise money right away.
- Stock as consideration. Often a reverse merger is performed on a platform company in a roll-up for one main reason: acquisitions can be made with stock used as consideration for acquiring stocks and assets. Without being constrained by cash resources a public company can offer its liquid stock as consideration for making an acquisition of another private entity. If a roll-up is occurring and the target shareholders and management are on board, having stock in a growing company may provide them with bigger upside potential that could help to sweeten the deal.
- ESOPs. In a roll-up scenario, former managers may also need incentive to make the transition as well. Offering an Employee Stock Ownership Plan from the public parent may present a compelling argument to hire and retain the best and brightest managers to ensure the surviving conglomerate remains successful.
Unfortunately, preparing and readying the public shell, performing public shell due diligence and completing the reverse merger are some of the least complex components of performing an adequate and successful roll-up. The process is fraught with risk. Conversely, for the seasoned and successful, the process can provide a rewarding payout where the combined and consolidated whole greatly dwarfs the sum of the individual parts. Perhaps a reverse merger with a public shell is part of your investment and consolidation strategy. If so, we would love to help.