Biotech Values

[DewDiligence]

Re: Definition of a “roll-up” company

There was some confusion on Twitter about this, so let’s clear that up. A roll-up company is not simply any company that makes serial acquisitions; rather, a roll-up company is a company whose EPS growth utterly and completely depends on making serial acquisitions to exploit the “P/E step-up.”

The P/E step-up occurs as long as the roll-up company trades at a higher P/E ratio than the companies it acquires, so that each acquired company’s earnings become capitalized at a higher price than they were before the acquisition.

However, as soon as something untoward occurs to the roll-up company that materially lowers its P/E ratio, the P/E step-up doesn’t occur and the roll-up business model becomes unworkable.