Multiple Arbitrage is one of the few Free Kicks you get in Business. This guide explains why it works so well, how its applied to Roll-ups going into an IPO, and why some Roll-ups Fail.

1. Multiple Arbitrage, The
Roll-up Playbook & Why
Some Roll-ups Fail: A Primer
Presentation by:
Dan J Da Silva B Bus (Acct) FCIS CFTP (Snr) CPA (Tres.) F Fin MAICD

2. Enabling New Models of Competition
Multiple Arbitrage
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3. Enabling New Models of Competition
Multiple Arbitrage: What is it?
Multiple Arbitrage – for our purposes - refers to the
potential ability to:
• Buy (a business or several businesses) for a low
earnings multiple - say, 3-5 Times EBITDA / NPAT or
other earnings base, and
• Immediately or very quickly realise financial value at a
much higher earnings multiple – say, 8-16 Times of
that earnings base.
The difference between the Buying & Selling Multiples,
multiplied by the value of the total earnings base, gives
the Financial Value of the Multiple Arbitrage.
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4. Enabling New Models of Competition
Multiple Arbitrage: In Practice
Here is the “financial magic” of Multiple Arbitrage:
• Buy 3 Businesses making $ 2 mil. EBITDA each at a 3
Times EBITDA Multiple: Cost = $ 18 mil.
(3 Businesses X $2 mil. = $6 mil. EBITDA X Multiple of 3)
• List the Group of 3 Businesses on the Stock Exchange
at an 8 Times EBITDA Multiple. Value = $48 mil.
(1 Business X $6 mil. EBITDA X Multiple of 8)
Hey Presto!! Same 3 Businesses, but -
An uplift of $30 mil (less costs) if done right!!!
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5. Enabling New Models of Competition
Scale in Business & Multiple Arbitrage
q Multiple Arbitrage – as described – occurs most often,
and is usually accomplished in, Mergers & Acquisitions
(M&A), when “scale” is achieved by a business.
q “Scale” essentially means Financial Markets & Market
Participants will value a bigger Business (or, an
aggregation of several small Businesses, as in a “Roll-
Up”) at a higher multiple than they would value a
smaller Business. This is because of the quantum of
earnings, diversity of earnings, business size, business
risk mitigation, lower potential operating cost base, scale
economies, deeper management teams, etc. etc. that
are attributed to a bigger business.
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6. Enabling New Models of Competition
Multiple Arbitrage:
The only “Free Kick” you get in Business!
Consequently, it is one of the biggest drivers of M&A
globally. Larger Companies on Higher Earnings
Multiples ‘gobble up’ smaller, similar-sized or even
larger rival businesses that have a Lower Earnings
Multiple, and thereby can immediately increase overall
Market Capitalisation.
“Roll-ups” of several small businesses (purchased at
‘low multiples’, followed by a public listing (IPO)) are
effectively “M&A on Steroids”.
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7. Enabling New Models of Competition
Roll-up & IPOs: Playbook
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8. Enabling New Models of Competition
Roll-ups & IPOs: the Playbook Pg. 1 of 2
q Roll-up Initiators will usually acquire a number of similar-
sector companies, at ‘Low Multiples’ of 4-6 Times.
q The acquisitions will be grouped, usually around the
largest company or the initiating company, the “Anchor
Company”, or around a Holding Company Structure, and
a Large Group will be built up. Many obvious synergies
and potential cost savings appear possible at this stage.
q Occasionally, only Conditional Contracts are required for
the acquisitions of the smaller companies, as the actual
acquisition (completion / settlement) could be subject to
a Liquidity Event occurring within a certain time period.
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9. Enabling New Models of Competition
Roll-ups & IPOs: the Playbook Pg. 2 of 2
q The acquired companies may participate in the future
Liquidity Event, and so may “Vend-in” some or all their
shares into the Roll-up structure. This significantly
reduces the need for cash outlays in the initial M&A
process, but lowers the value crystallised for the Roll-up
Initiators.
q The new Large Group then undertakes a public listing
on a Stock Exchange (IPO) at the Higher Group
Multiple, say 8-12 Times.
q The IPO is the key Liquidity Event, and usually involves a
significant equity capital raising. This cash is used to
pay down, or fully pay off, the acquisition debt funding.
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10. Enabling New Models of Competition
Roll-ups:
Why they Fail post-IPO
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11. Enabling New Models of Competition
1. No New Revenues: Cross-sell, up-sell & revenue diversification
opportunities not taken. Strong Rev. Momentum = Valuation Uplift = More M&A
2. Too Much Debt: Equity & hybrids must pre-dominate acquisition funding;
best if vend-in capital + option structures used to align vendors & the aggregator
3. Poor Acquisitions in Group: Under-performers cause earnings
downgrades, which hurts the Performers = Loss of confidence / cohesion
4. “Synergy” Traps: Cost Savings (Accounting, IT, Admin./HR, etc.) do not arise -
but, new / higher costs do - generally, higher-cost staff are employed by any
larger-scale / listed group. Assume ‘zero’ synergies; focus on Revenue growth.
5. Scale is Too Small: Cost base stays high; for IPO, minimum maintainable
EBITDA >$5-7+ mil.; listed company costs can swamp a tiny earnings profile
6. Leakage of Customers: Lock-in critical customers, but inevitable customer
losses must be factored into financial evaluations, & deferred payment terms
Why Roll-ups Fail: The “Unlucky 13”
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12. Enabling New Models of Competition
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7. Loss of Key Managers: An unforgivable sin; key people must be locked-in
from Day 1
8. Board Dysfunction: No significant block. Under-, or Over-representation
of Vendors on Main Board. Keep Vendors on Executive Committees.
9. Misaligned Interests: Vendor-Managers may miss the up-side at IPO, and
/ or, are disincentivised post-acquisition, or after Earn-out Periods
10. Culture: Forcing a new culture onto disparate businesses; also, see Brand.
11. Single Brand Focus: High re-branding + compliance costs for limited, or
no, financial benefit; plus, vendor principals & staff identify with the old brand
12. Bloated Head Office: Hubris & ego come into play; higher base + new
costs can be fatal if EBITDA is falling
13. The Post-IPO “Death Spiral”: Falling Valuations / Share Price = Less
Incentivisation = Falling / Poor Performance (i.e. negative loop)
Why Roll-ups Fail: The “Unlucky 13”
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