49 Comments
Jul 10, 2020Liked by Matt Stoller

Hey Matt. I once worked for a public accounting firm that would audit companies that were acquired by a midsize private equity firm. This was almost explicitly their strategy, but because they couldn’t compete with the larger PE firms, they had to make acquisitions in more esoteric spaces. Mostly niche B2B software that only has one or two real players. Not as big of dollars, but it backs up the point that you are making. This is happening EVERYWHERE.

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Jul 11, 2020Liked by Matt Stoller

This has happened in Audiology and hearing clinics too. Hearing aids have high prices and high margins. A high end hearing aid may cost $100 to 200 to manufacture, is sold to the retailer at $800 to $1000 and to the consumer for 2-3 times that amount. The PE rollups reduce service while demanding more patients are seen per day. If they can eliminate the Audiologist and just have a salesperson trained by the manufacturer, even better.

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author

That's interesting. I wonder how the new changes in the hearing aid market based on Congress removing cartel protections will impact PE in this space. Any thoughts?

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Has anyone actually succeeded in rolling up audiology clinics? I worked on this years ago - at that time, getting some market power as an audiologist allowed for the purchase of aids at 50% of the cost of an independent retailer. But audiology was a very hard industry to roll up at the time.

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I have recently been victimized by a niche roll-up: cloud backup services. For a number of years, I used a service called Mozy. Last year, Mozy was acquired by a firm called Carbonite, which has been gobbling up backup services. Carbonite more than doubled my backup cost, from $378 for 3 computers for two years to $685 by pushing me into an inappropriate "business" category. Now they're saying I need more space, for another $100 or they'll stop my backup. In their "basic" category, I should have been paying $252 with unlimited storage.

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This is the same Carbonite, I might add, that is constantly pushed by (mostly right-of-center) talk show hosts. Same with Gold, Silver and Coin-buying services. For all their talk about free-market principles, it seems that they only want single-entity free markets.

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This has been happening in the travel industry. The mom and pop tour operators from food tours to bus operators, to hiking and rafting guides have had to pay the pizzo (30-35%) to Viatour and TripAdvisor who have in turn created pipelines to push people into the same spots and overwhelm cities with toxic tourism that crushes local economies. Now with the entire industry in severe crisis, Viatour and TripAdvisor are demanding their suppliers, most of whom saw their income wiped out entirely, pay additional fees for the honor of remaining on their platform. (These micro businesses also had a tough time accessing that first round of PPP.) Viator responded to the crisis by eliminating cancellation fees for potential future guests, eliminating any possible way for the tour supplier to cover even their most basic costs. Their profit lust and complete dependence on algorithms is destroying the industry they profit from because they have am audacious disinterest in what guests want or how tour operators actually work.

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This is a bit different than private equity firms buying up competitors, but it's the same concept. Platforms such as Uber Eats and Door Dash (for restaurants) and Classpass (for gyms) will acquire users by providing services of scale (generally back office and marketing services) in return for a cut of the customer's business. Initially, the services are provided at a loss to the platform because the PE firm has more capital than all the customers combined. When the platform reaches a certain market penetration, then the fees are changed and customers are left with less and less income. In the case of Classpass, it was actually costing customers to offer classes on the Classpass platform (meaning negative profit) but the T&Cs were so onerous that the entity couldn't just leave the platform and continue offering the same service. So the owners would basically threaten to close and then Classpass would buy the business cheaply and then the platform owner would compete with customers on its platform. Rinse and repeat. The restaurant platforms actually copy customer menus and set up fake phone numbers so when a customer calls in to order directly from the restaurant, they are actually calling the platform's number placing the order. So now the platform gets it's cut of providing services. Rinse and repeat, etc.

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Jul 13, 2020Liked by Matt Stoller

This is also happening in the once super fragmented tabletop games market. Asmodee owned by a private equity firm has been rolling up all of the leading indie titles and publishers.

https://corporate.asmodee.com/news/

https://fortune.com/2018/07/23/settlers-of-catan-asmodee-acquisition/

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https://vimeo.com/337518583 See 3:17 of this video. "Over recent years Asmodee has been a consolidator in the board game market. As investors we want to continue to support the company to consolidate this highly fragmented market."

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it was happening with video games when 'Electronic Arts' was buying everyone out. But there was ultimately a backlash.

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Well, there is a small amount of economy of scale in port-a-potty manufacturing - but not enough to get many people worked-up over. Your point stands.

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Veterinary services are undergoing a global roll-up, I presume along the same lines and using the same arguments as for dentistry. I say global, because here at the other end of the world in NZ we're starting to see problems with every little vet clinic getting gobbled up by US firms funded by PE, and that is leading to ridiculous unnecessary bureaucracy and failures of basic office-keeping processes and administration.

Operations are "streamlined" after acquisition, and processes put in place based on what the owners think is best practice or more profitable, and usually it doesn't fit local operations and regulations at all and is actively counterproductive. There is of course no alternative according to the new owners.

So we've got unhappy overworked vets forced to work longer hours following unproductive processes, and I've got to assume less profitable branches than the independent practices that were there before. But because NZ is just as in love with laissez-faire as the rest of the western world, nothing can be done about it.

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Vet offices roll ups are a problem in the USA also. Back in the early 2000's I found a great vet clinic in Oceanside, California with a vet my dog loved. A few years later, that vet disappeared. I found him later at a new clinic and was told that all the vets were required to be on commission after that earlier clinic was acquired by private equity and he had refused. At least I then understood why what had been a conservative excellent clinic became high cost with procedures recommended in excess by a new crew of young vets apparently trying to pay off their school loans.

When I moved to Minnesota a couple of years ago, my first question at a vet clinic was who owns you which is the same question I ask at all professional practices of any kind now.

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Interesting. In my town there is headquarters for a vet clinic called Wellhaven that has a good reputation among pet owners I know, but I also know they have expanded to a ton of locations now and I talked to a vet in a coffee shop whose practice had “joined” and sent her in for some training or something.

Not sure what their ownership structure is.

Article from a couple years ago: https://www.columbian.com/news/2018/dec/24/alls-well-at-vancouver-based-wellhaven-pet-health/

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That's interesting!

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You are doing a tremendous service to the public, man. That same niggling feeling you started your piece with: 'it wasn't like this 15 years ago' is something I share w/ you.

I do a lot of home handyman stuff around my house. (I was once a licensed plumbing/heating pro). I see the results of the same roll ups in the tool & hardware sectors. Not just the big boxes killing off the mom & pop stores, but in the manufacturing of the tools themselves. This link looks at it more closely:

https://toolguyd.com/tool-brands-corporate-affiliations/

Just like media now being owned by 5 guys, tools & building supplies are owned by a small coterie of companies. I'm willing to wager that the actual manufacturing of drills, saws, etc etc is done by an even smaller number of factories in China.

Gotta question for you: In light of you closing w/ that hopeful note of Paine slagging Washington, do you think the rise of crowd funding for candidates (Sanders, AOC ) will diminish the power of the wealthy over candidates and hence policy decisions in DC?

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This is (and has been for a while) happening in optometry as well. Blue Sky Vision is one of the latest big companies buying up small, independent offices, but there are, of course, many others, not to mention Sam's Club/Walmart/Costco/etc. And it's made even worse by how screwed up the field is with regard to reimbursement: so little money is made off of professional services, especially when dealing with insurance, that the only way a practice can be profitable and survive is through the sales of glasses and contacts, which, as a result, have a fairly high markup, which is unfortunately necessary to balance things out.

And with more and more big corporations and online retailers selling these products cheap, it makes it incredibly hard for private practices. I'm normally a fan of competition making things cheaper for the consumer, and don't fault people for seeking lower prices, but in this case it's going to (and already is) have a negative impact on healthcare. Just one example of many of how is the fact more and more doctors are having to work for corporations, most of which don't care about the patient, only the customer. That is, they don't care if people receive good healthcare, only that people come spend money, especially since they sell cheaper products, so they have to do more volume. So that's how you end up with 15-minute eye "exams," because they just want the doctor there to feed people through to the optical as fast as they can.

I always find it amazing, too, how vision is considered by most people to be the most important sense, and most, if not all, people would be significantly debilitated and devastated if they lost it, yet so many people are willing to go to these assembly line shops over a real practice just to save a little money, often probably less than $50 a year. Anyways, I'd be surprised if there's a segment of healthcare that hasn't been majorly affected by this, though of course some are more than others, and as bad as things have become because of it, they are going to get a lot worse, in both quality of care and, very likely, in the number and quality of people that even bother to become doctors anymore.

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Very interesting article. I am personally familiar with many cases of this in the short-line railroad industry which has undergone a massive consolidation through roll-ups. The advantage of a roll-up is significant in that it allows you to get around the geographic constraints that may limit a business from having enough revenue to be well run. I have not seen, in this industry at least, any signs of monopolistic or predatory activities once there is a consolidation, generally what you see is an improvement in wages, reporting and customer satisfaction. But perhaps that is because they are geographically separate, so there really isn't much of an opportunity to buy three and close two and drive up the price on the remainder like during the days of the Robber Barons. One way to democratize this would be for the SBA to allow funding for these kind of acquisitions. Cheap money would crush Private Equity Funds.

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Great article. I believe this is happening in U.S. farming as well. As the population of farmers age, their land is being bought by private equity firms and rolled up into "tranches" of food-producing acreage all over the U.S. Because the land is so valuable, farmers can't resist the attraction of a big payout to fund their own retirement, and this makes the land too expensive for a younger local farmer to purchase. So America's next generation of farmers will be sharecroppers who work the land and sell the harvest to pay rent to the private-equity landowner.

Add this to the consolidation of seed companies, fertilizer companies, equipment and commodity traders (the "ABCD companies"), and farmers' effective earning potential has become tightly controlled, increasingly suppressed.

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As other commenters have already mentioned, this is also happening with veterinarian clinics. This story on it is pretty eye-opening - https://www.bloomberg.com/news/features/2017-01-05/when-big-business-happens-to-your-pet.

Thought you'd also be interested in this story on 7-Eleven and how they're using US Immigration enforcement to sever their agreements with franchisees - https://www.bloomberg.com/news/features/2018-11-09/7-eleven-is-at-war-with-its-own-franchisees-over-ice-raids

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I don't agree with 7-Eleven using ICE as a means to crackdown on recalcitrant owners, but the corporate entity can be found liable for violating immigration laws if they can't certify that all employees on their payroll are legally able to work in the US. One's opinion on the current state of immigration laws notwithstanding, the law is the law. Bad laws are still enforceable.

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Ameelio: The Free Prison Communications Platform

Disrupting a captive industry to reconnect the incarcerated with their loved ones & reduce recidivism.

https://www.kickstarter.com/projects/ameelio/ameelio-app

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But, eventually, this crowd-funded startup will be acquired by a private equity firm. That is the whole point of this article. In the long-run, new startups are rarely disruptive anymore. They simply become an acquisition target for a larger firm. Look at Whats App, Instagram, etc after they were all bought by Facebook. It's easier to buy than it is to compete.

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is it as simple, lower real rates drove high returns for private equity (levered equity), they get more capital as success makes it easier to raise capital. Lower cost of capital allows them to buy up mom and pops at a good arbitrage, largely on their lower cost of capital. The regulators turning a blind eye is incredibly disappointing as they were supposed to be the watchdogs. Now, we have a populous that is mad at the status quo, potentially the masses will finally awaken...thanks for your notes...

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Matt, incredible work here, great story telling and clear data. I wonder if the lowing of the "competition" across the board in so many industries gets at why corprate ROE's are no longer mean reverting. E.g. over the last decade ROE's have been more stable than at anypoint in last 50.

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