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Published: April 1, 2000

 
 

Strategic Rollups: Overhauling the Multi-Merger Machine

Getting it Right

Navigating through these pitfalls is the key to creating value in Stage 2. Exhibit 3 shows more specifically how to establish a strategy and a set of priorities for change that cover the four critical building blocks and two key enablers of successful rollups.

First, the organizational structure must be recast as a single entity, with different sets of responsibilities and reporting structures. Further, if value is to be captured from the increase in scale that a rollup brings, systematic sharing and deployment of expertise across the organization is essential. Continuing to operate as a loose confederation of companies (often typified by a geographic structure) undercuts the rollup's ability to extract value.

Second, organizational change alone is not sufficient. Fundamental change to the operating model is essential, too. That means consolidation of facilities, institutional purchasing, best practices deployed among the sales force, and so on. Achieving compliance with institutional programs is extremely difficult unless it is supported by changes in human resources policies and incentives, and unless they are buttressed by information systems and tools.

Third, new financial management systems, including a new budgeting process, a new set of financial controls, comprehensive forecasting methods, and enhanced investor relations, must be put in place. Waste Management CEO A. Maurice Myers noted that his firm had not put such financial management systems in place well, and as a result his organization was having a hard time understanding what was happening at the operating level. Acquired firms are often on different general ledger systems (if they have a general ledger), and they use different accounting standards. As they continue to be run by the old owner-operators, controlling cash and capital expenditure is also very difficult. An inability to gain control of this situation quickly can doom even the best business plan. And shortcomings in this area can affect external credibility as well. At an investors' meeting, one analyst asked a rollup CEO, "So, how much of your business is in Illinois?" After a long pause, the CEO mumbled, "Uh, well, uh, we'll have to get back to you on that."

Fourth, rollups must redefine the basis of competition. Even if a management team can capture the benefits of its newfound scale, it must still determine how to leverage this position in the market. A rollup should not tolerate the loss of customers in the integration process. Rather, its strategy should be to increase its share through organic growth—growth predicated upon a superior value proposition incorporating geographic coverage, cost position, superior customer management, or consistency of service. Because most rollups compete with other rollups, acquisition premiums can be very large. Unless the rollup can capture both cost savings and revenue growth, the premium cannot be recovered. Stage 2 activities, to be accomplished most effectively, must be planned early in Stage 1 and undertaken as soon as possible.

In addition to these building blocks, the enabling role played by information technology (IT) and human resources (HR) cannot be overstated. In a rollup, dozens of technology systems and many hardware platforms create chaos. If each acquired company operates a different system, little value can be created until management develops common data elements (so everyone will call the same thing by the same name); a single customer database (you can't provide broader geographic coverage if your computer systems can't recognize a customer across boundaries); and at least an emulation of a common operating system. Integrating IT can be a daunting challenge, and systems issues lie in the path of almost every change initiative. One critical action to lessen these complications is to involve a CIO or other senior IT staff in the acquisition stage.

 
 
 
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Resources

  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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