The technique we often see in early market business combinations is called the “Roll-Up.” In this situation, normally, but not always, the stronger companies in an industry will go around purchasing smaller or more niche companies to meet their increasing financial and strategic objectives. In the long term, this tactic not only provides the acquiring company with financial and human capital resources, but also, depending upon the deal structure, may allow the owners of the acquired companies to continue to participate on an equity basis in the growth of the industry. Further, roll-ups often lead companies to hit the revenue, EBITDA, and market share milestones that then make them attractive to professional investors, which also re-invigorates the industry with additional capital and management resources.
Another common tactic is strategic partnerships. The benefit to this structure is that all participating companies normally retain full ownership of themselves and the structure itself is extremely flexible; allowing the participants to work together where they want to while acting separately where they feel appropriate. Companies may join together to achieve such objectives as co-marketing, sharing manufacturing and/or distribution resources, and/or sharing back office operations and compliance.
A “hybrid” of the strategic partnership, the “Joint Venture”, frequently occurs in situations where companies want to share risk in a new project. A joint venture occurs when two or more separate companies jointly form and share in the ownership of a third entity that has a specific purpose to meet their common objectives. Perhaps the most common example of the joint venture is found in the traditional energy industry where two or more petroleum companies will join together to explore and drill an area for exploration and extraction of oil or gas. In the vapor industry, this structure could be particularly advantageous in areas such as manufacturing, distribution, and public relations.
A variety of business combinations always have been one of the cornerstones of growth within an emerging industry. The pooling of finances and talent in a mutually beneficial manner between companies has led to some of the most successful enterprises in history. It is clear that for the vapor industry to survive without being totally dominated by a few large tobacco companies, the enterprises with the most financial resources and/or experienced management teams must lead the charge to begin the consolidation among firms with brand and revenue strength.