Which is the most consolidated industry? The answer is remarkable and will surprise many. It is software; for around 40 years now, Microsoft’s Windows (previously DOS) has occupied the hard drive of every personal computer in the world.
There is no rival. There is no upstart about to take its place (at the time of writing). But Windows’ success is as much about consolidation as anything else.
In this article,DealRoomlooks at why and when consolidation happens.
What is a Consolidation?
Consolidation is a process that occurs any time that an M&A transaction occurs. The term is generally used to describe what happens when certain industries become less fragmented, usually enabling a handful of companies to yield power through mergers or acquisitions - i.e., consolidation. In most industries - even in the aforementioned software industry - consolidation has played a central role in how the industry has been shaped to this point.
There are a few perspectives on consolidation, which we will look at in more detail below:
Motives for Consolidation
The motives for consolidation mirror those for mostM&A transactions: Essentially, there has to be a compelling economic motive to combine. This could include:
When Does Consolidation Typically Happen?
Consolidation usually happens in fragmented industries, where market participants or investors see that there is significant value to be added from consolidating. This happened in most countries’ banking, pharmacy, and food retail industries, where a small group of three to four players tend to dominate.
Why? Because of the value that can be generated by consolidating each of these industries.
In banking, for example, banks can easier sell asset management services and mortgages to clients as soon as they’ve acquired them as required customers.
Consequences of Consolidation
Aside from the obvious - companies becoming bigger - there are several consequences of consolidation that tend to routinely occur. These include:
Consolidation Strategies
The consolidation strategies are:
Stages of Industry Consolidation
As a general rule, the more consolidated an industry becomes, the more challenging M&A becomes.
That is, as soon as everybody knows that industry consolidation is afoot, the behavior of the market participants changes - competitors begin competing for the same space, companies sell for higher margins, and the ease with which transactions occur isn’t the same as before.
Broadly speaking, the stages of consolidation are as follows:
Navigating Consolidations
As this article has hinted at, consolidation demands that participants strike a balance between growing and keeping external stakeholders happy.
DealRoom has worked on many transactions in this space and has witnessed this delicate balance.
Succeeding here demands that companies move fast, provide open channels of communication with regulators, and remain focused ondue diligence- which can never play second fiddle to regulatory work.
Other factors to consider while navigating consolidation include:
Summary
Consolidation is a reality. It’s everywhere. In fact, companies that excel in consolidation tend to excel in their industries.
Talk to DealRoom today about how our M&A project management software can help your company navigate the challenges of industry consolidation, avoid the pitfalls, and extract maximum value before the anti-monopoly regular has even heard about it. Learn More