From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

Deadly Strategy Number 3 is Rollups – making the market more efficient. There are many industries with lots of competition, it makes sense to bring them together. The larger company would have increased purchasing power (lower prices), it would raise money or capital at a lower cost; there would be brand recognition and advertising either regional or national; more people would work at the company or more opportunities in it and the revenue would be greater. What is not to like?

In the real world it is a rare rollup that actually works – SYSCO, Waste Management, AutoNation. Unfortunately they are many more that work for a while then died. They work for a while because the concept makes sense, growth is unbelievably good and problems have not come to the surface. One of the big problems is the growth – if growth slows (and it will) investors disappear, and financing stops. To keep the illusion of growth fraud happens – MCI, Philip Service Corp., Westar Energy, Tyco, FPA Medical, JWP, and Loewen Group are some examples.

Why does the theory often not work? standardization is hard to accomplish. When a business is bought, do the good things about the business get transferred to the new acquirer? Does the company always have to have growth? There are plenty of dis-economies of scale, what systems will break down? how will the competition react? Sometimes the acquirer allows the existing company to keep its autonomy which means the purchasing power expectation does not happen.

There are always more questions than answers, till next time – to raising questions.