A roll-up merger is the process of acquiring smaller companies within an industry to form one larger firm. To start a roll-up, investors purchase companies they believe complement each other or might realize greater economies of scale if combined. Oftentimes, the investors are private equity firms that specialize in a particular industry.
Roll-up mergers allow resources, employees and products to compete on a scale that is difficult or impossible without the assistance of the other firms in the roll-up. Ownership of the individual companies transfers to a holding company, and prior owners receive cash and shares in exchange for their businesses.
Other than being able to reduce marginal costs, businesses and products benefit from roll-ups through increased exposure; name recognition; access to new markets or demographics; and from the expertise of others within the industry. However, this process has its limits and investors must be careful to avoid becoming too large and experiencing diseconomies of scale.