Wall Street’s Love Affair with Roll-Ups: Profit or Pitfall?

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Trainer discussed Wall Street’s Love Affair with Roll-Ups: Profit or Pitfall?. Here’s an excerpt from the episode:

Tobias: Canadian roll up. Levered roll up.

David: Right. Yeah, the roll up stuff has always been– That’s an old time Wall Street trick.

Tobias: It makes it hard, because you got to deal with new financial statements every single time. With a big acquisition, every single time, so there’s no continuity.

David: Yes. They tend to be very well supported by Wall Street, because Wall Street is making a bunch of money [crosstalk] earnings.

Tobias: I don’t like the money. Yeah.

David: Right?

Tobias: Yeah.

David: All the way along, and they love selling that. And as long as the acquiring company has a higher PE and they’re buying lower PE companies, it’s earnings accretive, regardless of the economics.

Jake: Yeah, top line can look really good.

David: Yeah. One of my good buddies, I was at Credit Suisse with, who went over to Goldman Sachs, I remember he called me maybe 5 years or 10 years ago and said, “David, man, I just realized these roll up things are just a scam.”

[laughter]

David: I’ve done enough of them now to realize, once you’re done and you got no more to roll up, you end up with a business that’s got all these acquisitions. Most of the acquisitions were overpaid, and so they’ve got all this– just a junk pile of stuff that’s not really been fit together, but all the way Wall Street is making a ton of money. The acquiring executives are making tons of money. Their comps just going up because they’re a bigger and bigger company, they get bigger peers to judge comp against. Yeah, it’s a great money-making scheme for those that are in the know, but the investors, at the end of the day, usually get left holding the bag.

Jake: Well, David, there’s synergies at the end of the rainbow that are going to make it all work.

David: Yeah, that’s great point. The synergies are [chuckles] rolling there. That’s right.

Tobias: In the 1980’s, that sort of roll up was very popular. They called them entrepreneurs. They had their own index, the entrepreneurs index, and you’ll never guess how it finished.

Jake: In Australia, right? This is–

Tobias: Yeah, this was in Australia, which is why I’m skeptical. I’m always skeptical of anything. That’s a roll up type thing, which is why I probably missed Credit Suisse, not Credit Suisse, Constellation for a little while. Just looks like a roll up. But probably smarter than your average roll up. Berkshire’s a roll up, right? Smarter than your average roll up.

David: Yeah.

Jake: I don’t know if I would classify that. That’s a serial acquirer. But roll up to me tends to be in the same industry.

Tobias: Industry specific. Yeah.

David: It’s a consolidation theme, where there’s the synergies in a highly fragmented industry, we’re going to bring these companies together and see all these synergies. Fairfax is mostly rebounded from the Muddy Waters report. It’s surprising, because I thought the Muddy Waters guys did good work. But if they’re just leveraging their reputation to try to make quick buck on a short, that’s not a good look.

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