Military Monday: More About Roll-Ups In Defense
Expanding on thoughts from last week
Last week I mentioned that I was thinking about roll-Ups in defense.
I teased the topic, but then rushed my post and didn’t really describe what I was thinking about or why it’s important.
Today, I want to go back and hammer that out a bit more.
But before we do, I want to acknowledge the very real and large impact that the crisis at Silicon Valley Bank has had on the tech industry. I am relieved that the FDIC has said depositors will have access to all of their funds beginning today, but also know that we’ll feel the ripples from this for a long time.
Technology plays a critical role in America’s progress and as such it is a national security issue.
We seem to have averted disaster, for now, but we must be careful in the future as well. As many leading VC firms announced in their joint statement, the Silicon Valley Bank has played and will continue to play an important role in the ecosystem.
What are Roll-ups
Roll-ups refer to a strategy in which multiple smaller companies are acquired and combined under a larger holding company, with the aim of creating economies of scale, reducing costs, and increasing profitability.
The roll-up strategy is typically used in fragmented industries with many small players, where consolidation can lead to greater efficiency and competitiveness.
Additionally, roll-ups can provide a hedge against certain operating risks and often appear during and shortly after market downturns.
Sometimes, these companies are referred to as “poof” companies—which as a term, I always enjoyed and found humorous during business school.
Some examples of roll-ups include:
Kraft-Heinz Company
Blockbuster Video
Waste Management, Inc
MCI
And more
Roll-ups, naturally, are not without risks and issues though and must be considered carefully.
Roll-ups in Defense
If you’ve been reading Building our Defense for more than a day, you’ve likely already been exposed to the importance of the defense sector, and specifically the defense technology sector.
It is a critical part of our nation’s economic and physical well-being.
With the increasing complexity of modern warfare, there is a growing need for innovation and efficiency in defense procurement and supply chain management.
But some of the persistent and stubborn challenges associated with the sector include the high barriers to entry, the long lead times to secure enduring contracts and programs of record, and complex regulatory environment.
This has led to the consolidation of the defense industrial base to only a few “primes.”
These “primes” are not inherently bad, in any way. I have tremendous respect for them and they have done much for the good of the country and our defense.
The system, however, is no longer designed to promote innovation. Rather, it forces these primes to focus on filling what the government says it needs, without always leaning-forward to find what the government will really need.
I believe that one possible solution could be a business roll-up.
Of course, the irony is not lost on me that the defense primes became the defense primes through roll-ups.
Still, I think that a modern roll-up or two focused on acquiring the most innovative companies in the defense sector would increase competition for the primes and potentially trigger a change in the landscape that creates additional opportunities for smaller companies to enter and compete on contracts.
Roll-ups in defense are not new (see two paragraphs ago), but it sees that a carefully executed one could prove truly disruptive.
Push-back
This edition of Building our Defense represents a bit of a thought experiment—and admittedly not a fully fleshed out one.
I’d love any competing thoughts on why a roll-up wouldn’t work in Defense or why it would be detrimental to our defense.
Drop a comment to let me know your thoughts.
And more then ever it’s important that we…
Keep Building!
Andrew