Are they Right for You?
Are they just
acquisitions on steroids, or the way to play with the big boys?
(McLean, VA April 22, 1999) It
was a debate in which both sides agreed on the fundamental principleroll-ups can be
a good business strategy...sometimes for some companies. They can also be a mistake,
however, so when and why become the big questions. The two entrepreneurs who
spoke at this morning's Netpreneur Program Coffee & DoughNets meeting have arrived at
different answers to those questions for their businesses.
Drew Clark, President of Verio East (http://www.verio.com), is
the self-described "accountant with an attitude," who presented some of the why-fors
of roll-ups, including why he helped sell his former company, ClarkNet, to Verio in that
company's roll-up of local ISPs. Nelson Carbonell is President and CEO of Alta Software (http://www.altasoft.com),
a custom application developer for the Web. This software engineer-cum-entrepreneur has
turned down more than a few roll-up minded suitors. Between them was moderator Bob
Starzynski, editor of TechCapital magazine, whose recent commentary inspired the
topic, "Business Strategies in the New Economy: Roll-Up Or Not...Is It Right For
Just what is a roll-up? It's a
strategy for buying and combining a series of small businesses in the same or very closely
related markets into a large business. Carbonell called them, "acquisitions on
steroids," but for entrepreneurs like Drew Clark and his cousin Jamie, who founded
ClarkNet in 1992 as just the second ISP in the Greater Washington region, it was the only
strategy that made sense in such a rapidly changing and competitive marketplace.
|What Makes an Industry Roll-Up
Favorable market conditions in the targeted industry, not
Enough players that you can find suitable companies to acquire.
A landscape with a couple of large companies and a lot of undervalued "mom
and pop" operations.
Conviction that a real business can be built in this space.
Before going with Verio, the
Clarks asked themselves a series of questions: Could they continue to invest in the
company to provide service levels which the market was demanding? Could they continue to
attract the caliber of employees they had in the early days? Could they continue to be
attractive to banking institutions? These are questions every entrepreneur answers every
day, but after six years in business, the answers were starting to come up,
Clark, "one of the things we also evaluated was the culture and the management team
that had been put in place to take Verio to the next level." They felt comfortable
with that mix and confident that there were opportunities for them to grow with Verio.
"If you're going to participate in a roll-up strategy or become part of an
acquisitive company," he asked, "what's the role for you in the future? Can you
commit to that organization? Does it have the same values and same beliefs that you
Why do companies pursue a roll-up
strategy? Among other reasons, it offers the opportunity to attract bigger clients,
purchase materials and services more cheaply, reduce administrative costs, acquire a
competitor's customer base or become more attractive to the skilled technologists who are
in such short supply. Basically, to grow big, fast.
"I don't think they [roll-ups]
are inherently good or evil," said Starzynski to open the session, "but if done
for the wrong reasons, they can be troublesome." Some of those wrong reasons include
rolling up stagnant companies to give the illusion of growth, when strategy and tactics
are too tightly contingent upon equity markets or "poof transactions," and when
the acquired entrepreneurs are not really ready to let go.
It's all a matter of your goals as an
entrepreneur, because every position has two sides. Take the question of employees. For
Clark, one of the advantages of being part of the Verio roll-up is that the company can
attract better technologists because they can now offer different and more challenging
projects. For Carbonell, it's exactly the opposite. In a service business like his, he's
more concerned with keeping the proven employees who have relationships with customers.
That becomes harder after the culture shock and personal fortunes which can result from
In fact, most of the arguments for the
roll-up seem to revolve around wealth and exit strategies. "Whenever they tell you
it's not about money," laughs Clark, quoting Mark Twain, "it's about
Perhaps audience member Charles Owens
of AbleMedia (http://ablemedia.com)
put his finger on it. A former investment banker involved in numerous roll-ups in other
industries, Owens suggested, "Those roll-ups were investor strategies. They weren't
entrepreneurial strategies and we rolled up entities which, as far as management was
concerned, were passive management entities. . . . The idea of rolling up 50 companies is
strictly an investor play. I can't imagine it being in the interest, primarily, of the
Carbonell's take on it is, "if
you think you're done, then sell. If you think you're not done, then don't. And if you
think that you can sell without being done, well, most people end up disappointed in that.
I always imagine it's a challenge to manage a company where 40 guys used to be president
of their companies."
One audience member, Arnold Kling from
likened that kind of situation to "trying to roll up several rock-and-roll bands into
"If the value proposition from
the roll-up-er is 'We can get you away from all of that stuff you don't want to
do,' then why did you become an entrepreneur to begin with?" asks Carbonell.
So what's the answer? Roll up or stand
pat? Each decision will be different because of the players and contracts involved. Just
take the time to do your homework and know what you want from the deal. You can't even
generalize about the nuts-and-bolts, because something as basic as transition periods can
range from 30 days to three years. Clark's advice? "You have to figure out the true
value of what you're receiving for what you're giving up. At the end of the day, are you
comfortable with that exchange?"
Copyright 1999, Morino
Institute. All rights reserved.