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 / Second Quarter 2000 / Issue 19(originally published by Booz & Company)


Strategic Rollups: Overhauling the Multi-Merger Machine

Tales of Misfortune

Sounds simple enough, doesn't it? So what can account for so many failures? Our experience shows it's the inability of a rollup to kick-start the wheel of fortune. Contemplate, for a moment, Waste Management's saga. In 1998, USA Waste Services Inc., an up-and-comer in the solid-waste industry, merged with Waste Management, a faltering leader. Waste Management's share value roared from below $30 to a peak of about $55 per share in mid-1998, when the merger was finalized and the combined company assumed the Waste Management name.

Its 1998 annual report assured shareholders, "We have met the challenges head on, moving swiftly to unify operations and take full advantage of the potential synergies. We have addressed operational issues on every front—consolidating routes and reducing transportation routes, streamlining field operations and facilities, standardizing systems and procedures, and eliminating duplication of administrative and managerial functions."

But little more than a year later, in December 1999, Duff & Phelps Credit Rating Company, while reviewing Waste Management's debt, noted "lingering systems issues" and "the loss of customers through systems and performance difficulties" after the consolidation with USA Waste. At the time, Waste Management's shares were trading below $20 per share, and had been doing so for months.

Or consider Corporate Express, a major distributor of commercial office supply products. Between 1995 and 1998, the distributor acquired more than 200 companies and assumed huge amounts of debt. Despite many widely publicized restructuring initiatives, Corporate Express failed to transform itself and climb out from under its debt. By September 1999, it had lost nearly $2 billion in shareholder value. Shortly thereafter, it was acquired by Buhrmann NV, the Dutch parent company of BT Office Products International.

Even good execution can't save a flawed business model, such as the "big box" superstores in the used-car business. AutoNation offered a sizeable inventory for one-stop shopping and a large staff of salespeople who were paid salaries, not commissions. It bought up hundreds of local dealerships, using company shares to pay for acquisitions, reminding people at every opportunity of Waste Management and Blockbuster Inc.—previous rollups driven by entrepreneur H. Wayne Huizenga. "We want to build a brand just like we did at Blockbuster," the company said in its 1995 annual report. AutoNation's spacious lots had an ambience more like a café than a used-car dealership on the edge of town: showrooms with giant televisions, indoor playgrounds, and child-care centers.

In fact, while AutoNation offered what appeared to be a differentiated and attractive value proposition, it lacked the essence of a true rollup—a fundamentally superior way to make money. Its plan carried enormous costs, from decorating to staff. And it found it had no way to drive down the basic cost of the business—buying cars. Unlike new-car dealers that accept many used vehicles as trade-ins, often on favorable terms, AutoNation had to compete at auctions with other dealers to build its inventory. With relatively high fixed costs, a huge inventory that depreciated in value with every passing week, and no sign of improvement, AutoNation bailed out and exited the used-car business in late 1999.

Right Stages, Wrong Turns

In general, successful rollups must navigate through three distinct, but overlapping, stages of development. Charting the course requires a superior vision, a strong management team, and the right applied know-how.

Stage 1: Create an acquisition engine. The concept of radically restructuring an industry's economics through consolidation requires the ability to identify, negotiate with, and acquire dozens and dozens of companies. Usually, the first couple of deals are the most crucial; they establish credibility and become the flywheel that drives the rollup forward. A rollup team must have skilled negotiators who can woo owner-operators but, at the same time, not burden the rollup with promises it can't keep, or commitments that will handicap the rollup as it evolves. The team must also have the financial, legal, and management skills to make several acquisitions a month. U.S. Office Products, for example, made close to 250 acquisitions in less than three years—almost two a week. But a rollup concentrates its management strength in merger-and-acquisition skills at its own peril. The initial team also must have in place skilled management ready to transform those acquisitions.

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  1. Keith Bradsher, “A Breakdown on the Sales Lot,” The New York Times, December 15, 1999
  2. Peter Elkind, “Waste Management: Who’s Driving the Rig?” Fortune, September 27, 1999
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