What does "multiple arbitrage" imply in a roll-up acquisition scenario?

In the context of a roll-up acquisition scenario, "multiple arbitrage" refers to the strategy of acquiring companies at a lower valuation multiple than the acquirer is valued at post-acquisition. This implies that the acquirer can benefit from an increase in overall company value by merging the acquired companies into a larger enterprise that has a higher valuation multiple. By purchasing targets at lower multiples, the acquirer can effectively enhance its own value once these companies are integrated, leveraging the market's perception of a larger, combined entity.

This strategic approach takes advantage of the differences in valuation multiples between the acquirer and the targets. As the acquirer integrates these targets, the business might become more valuable due to factors such as increased market share, economies of scale, and enhanced operational efficiencies, thereby allowing the acquirer to capture the profitability derived from this difference in valuations.