AGB 2020.4 - TransDigm Group (TDG)

All About the Reinvestment Rate (Acquisitions)

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TransDigm Group

Roll-up business models usually fail in two ways. In the first way, the acquired assets don’t produce a high enough return to justify the cost of acquisition, even when factoring scale advantages. In this case, the cash flows produced from the acquired assets less the payments on the new debt are only slightly positive or even negative. Management teams of these roll-up models think that bigger is better, regardless of the quality of the revenues.

In the second way, the acquired assets aren’t defensible during an economic downturn and the once predictable cash flows are hampered like the rest of the economy. The internal downside model scenario isn’t conservative enough and the company has trouble servicing its debt. As you can see in both cases it’s the debt that ends up crushing the value of the equity.

But TransDigm isn’t your typical roll-up model. The company aims to acquire companies that sell propr…