Long ago, I was very interested in the "Poof IPO" concept.
With a Poof IPO, several companies agree to merge, but the merger is contingent on a successful public offering. For a Poof IPO to work, investors in the IPO must believe that the combined companies will move on to greatness after the IPO, generating future cash flows that make it worthwhile to buy the shares at the time of the IPO.
My first exposure to Poof IPOs came from talking to a fellow Yale School of Management alumnus, Greg Kidd. Greg founded and took Dispatch Management Services Corp (DMSC) public on the NASDAQ.
DMSC is a good example of a Poof IPO. You can read their full Form S-1 if you like, but the net of it is that Greg aggregated a sizable number of courier services companies (e.g. bicycle messengers) together to create a public company. Most of those acquisitions were contingent on the successful IPO, and, sure enough, the IPO was a big success.
My understanding is that the company had a good run after that, but ultimately, despite Greg's best efforts, fell prey to a few common post-merger integration pitfalls. (In the end, DMSC's longest lasting legacy is probably going to be that Greg hired a talented programmer named Jack Dorsey, who ended up starting a small venture that did pretty well: Twitter. I also feel like DMSC is interesting because it was very Uber-like, fifteen years before Uber; if you think about it Uber is just a roll-up of many independent contractors who drive people around.)
To be sure, it's very difficult to merge disparate companies run by founders and executives with big egos, and when you do that with a public company and there is a large pool of money from the IPO, many stakeholders can conclude that building value for the long-term may not be the best use of their time. My sense is that's the DMSC story in a nutshell.
Poof IPOs tend not to do well, and these days, Poof IPO is a pejorative phrase to most folks.
In fact, the Poof IPO is just one instance of a broader financial transaction type, called a roll-up. Waste Management was probably one of the first big roll-ups, if you remember them.
Some studies, including this one have shown that public companies with roll-up strategies, or "consolidation strategies" as they are also known, tend to not do well as public companies. But let's not throw the baby out with the bathwater, folks.
My Startup Idea
All of the above notwithstanding, one shouldn't dismiss the roll-up concept out of hand, and my startup idea, dating back to 2000 when I was thinking through dotcom startup ideas, is essentially a website that helps potential roll-up companies, in any given niche, to find each other, agree to merge, and do so contingent on an acquirer or funder making it worth everybody's time and effort.
The reason this can work is has to do with valuation multiples and the current state of exit opportunities for small- and mid-sized businesses.
Magic with Valuation Multiples
Sadly, a small but successful business often has very limited opportunities to sell to an acquirer. With revenues and EBITDA below a certain level, there are very few suitors. Those companies may not be able to find a buyer at all and many just close down when the founder retires, a very big societal loss.
Once revenues and EBITDA pass a certain threshold, however, buyers tend to show up. But for small companies, they are usually only willing to pay a price that correlates to a low EBITDA multiple.
EBITDA multiples vary from niche to niche (and from deal to deal of course). But as an example, let's say that with $1 million in EBITDA, a company can get a $4 million exit price. This means the EBITDA multiple is 4X.
Strangely, in the same niche, it would not be uncommon for a company with $2 million in EBITDA to get a 5X EBITDA multiplier. The larger company might receive a $10 million buyout offer.
That's because as a company gets bigger and more profitable, the multipliers tend to rise. I'll leave it as a thought exercise for you to think about why that's the case, but this dynamic in the market is well documented, and it's one reason that roll-ups are attractive.
Consider my industry niche above and the facts I've given you.
Now, let's envision a scenario in which Company A and Company B are both looking for an exit and each has EBITDA of $1 million. Selling separately, each company can fetch $4 million, and the total for both transactions is $8 million.
But what if, instead of selling the companies separately, we merge them together and then try to sell them. Now, EBITDA is $2 million for the new company, and we get $10 million. That's $10 million instead of $8 million, a very handsome improvement on exit proceeds for the owners of these two companies, don't you think?
Dating Site for Companies Searching for an Exit
So that is basically the concept for my startup, and I had this idea years ago and sat on it.
As the years went by, online marketplaces that matched buyers and sellers were launched and prospered; BizBuySell.com is one that I know well and think highly of.
But they never gave sellers a means to aggregate into a large company.
In modern terms, I think of this idea as Tinder for M&A, a dating site for companies looking to merge with other companies in their niche.
It's never a good idea to sit on a business idea for fifteen years.
Sure enough, if you do a Google search on "Tinder for M&A," you'll find a December 2015 article by Alex Sherman that talks about a company called Axial Networks doing online matchmaking of the sort I had envisioned.
The article also mentions other doing something similar, including Intralinks Holdings Inc.'s DealNexus and MergersClub.
You Can Still Pursue This Business Idea -- Go for It!
I doubt that Axial or any of its peers are doing exactly what I envisioned.
The business I was thinking about would focus exclusively on small company roll-ups, going well beyond simple matchmaking.
Mostly, ventures like Axial connect private equity firms to opportunities. They don't connect businesses that are looking to merge with other businesses.
There's a lot of backend workflow and transactional complexity to doing a roll-up that my site would need to facilitate.
Some might even argue that it's not possible to do this with an online site. If you've put, say, eight years into growing a company to a certain size, would you really be willing to merge with some other company you barely know, that you met on an online dating site for merger opportunities?
In the end, it's all about execution. People were skeptical about dating sites when they first came out, but now they are the norm. The same could happen with this idea, and it really doesn't matter that others are already trying to facilitate M&A deals online.
Just as Google spanked early then-market-dominating search companies like AltaVista and InfoSeek, I have no doubt that a really good startup team could create something incredible with this "online roll-up facilitation" idea and quickly leave Axial and others in the dust.
Anyway, that's my idea. If you want to pursue it, it's all yours.
All I ask is that you send me an invite to your IPO party. Good luck and have fun!
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