What's a poof IPO?

A poof IPO is an unusual and innovative method of bringing groups of small companies in similar businesses, typically with tens of million dollars in revenues, to the public market. Using the funds from the initial public offering, the entrepreneurs are able to buy additional companies through a strategy known as a ''roll-up.''

Here's how it works : A venture capitalist will approach several private companies in the same industry, such as bus companies or air conditioning contractors. They then arrange an IPO to buy the companies and combine them into a single operating unit. The owners receive a combination of equity and cash. Some investors describe the maneuver as a ''poof IPO,'' a kind of magic act where several companies are transformed, poof, into one company.

Surprisingly, its a strategy that has attracted a lot of other players. Those who play the roll-up game, often known as consolidators, tend to seek fragmented markets with no clear market leader. The idea is to buy up lots of companies to boost revenues and earnings while saving money through economies of scale. Given the nature of the deal, it's evident that most such poof IPO deals happen when the stock market is at an unusual high.

It's a bit difficult to identify companies in the Indian context who can be identified as 'poof' IPOs. On 'roll ups', a company like Teledata Informatics seems close as it shows an insatiable appetite for lapping up companies in India, Singapore, UK, Thailand, Indonesia and US. (here).

However : the concept is innovative and can be very rewarding if operations can be perfectly consolidated, a strong management can be seated and a proper focus laid down for the business. Some areas, I can think of, that allow for such opportunities include medical centres (a chain of clinics), gymnasiums (a nation-wide branded health centre) etc. The reason why tuition centres might not fit the bill as they are uniquely service oriented & getting consistency in service and methodology might be difficult. So, the next time the stock market goes high and you can organise 10 similar business (of revenues of say, 1 crore each) ... do your math (10 businesses of 1 crore each at a multiple of 15 = Rs. 150 crore IPO) !