Accelerating Industry Consolidation – Another Consequence of COVID-19

by Mark Kaiser

Mark Kaiser is a serial entrepreneur, innovator and advisor to over 40 Fortune 500 companies on M&A, innovation and corporate venture investing.  He has led a number of industry consolidation plays acquiring over 100 companies across a range of industries (technology, telecom, healthcare data & analytics and home services).

Consolidation of industries is a fundamental truth in business. Most new industries are fragmented and consolidate as they mature and this happens through a predictable and clear consolidation life cycle:

Stage 1 – Opening: This first stage generally begins with a single start-up followed by the gold rush of hundreds of other entrepreneurs and inventors who seek to capitalize on a new and exciting opportunity.

Stage 1 is the wild, wild west of business. Companies in Stage 1 should aggressively defend their first-mover advantage by building scale and establishing barriers to entry by protecting technology or ideas.

Stage 2 – Scale: Major players will begin to emerge. Those who execute best on sales and marketing will be able to move beyond early-adopter customers to be able to convince the majority of the market that their new product, service or business model delivers a benefit they actually need at a cost/benefit proposition that is appealing to a larger market.

The top players typically own 15% to 45% of the market.  These leading companies often are the first to look to consolidate their industry or segment.  Once consolidation begins, it typically happens at a relatively fast pace as the competition to buy the best players is fierce.  The survivors / winners will hone their acquisition and integration skills.  Building a scalable IT and HR platform is typically crucial to rapid integration of acquired companies.  Having a dedicated acquisition team is also critical as not to distract the people operating the existing business from their primary job.  As with any undertaking, the process of acquiring and integrating businesses improves with repetition.   

At TelecomUSA, we acquired 50 companies in 3½ years.  Not only did we create a billion-dollar revenue company fast, we became highly skilled in identifying, evaluating and integrating companies that fit our profile of an ideal acquisition target.    As a result, we became more aware that all acquisitions were not the same.  The size of the acquired company and the role it would play in our company were keys to handling an acquisition differently.  For example, strategic acquisitions that extended our product set were different than tactical acquisitions that expanded our geographic market coverage and those were different than the acquisition of a customer base within our current geographic footprint.  Each had a different playbook – different valuation metrics, transaction terms and conditions and post-closing actions.

Stage 3 – Shakeout: After the fierce consolidation of Stage 2, there will generally be 5 to 12 major players and the field often ends up consolidating to the point that the top three controls 35% to 70% of the market.  New entrants will often be crushed, acquired or emulated by the major players.  Even if a company is lucky enough to survive independently to this point, margins will likely erode and valuation multiples will decline due to the strong competitors and limited options the remaining sellers may have. Worst yet, the extreme holdouts will often shut down our be bought out of bankruptcy.  

Stage 4 – Plateau:  The survivors focus on defending their leading positions and often are lulled into complacency by their own dominance.   The great thing for entrepreneurs in industries that have matured, the complacency means that there will be a new round of opportunities to deploy new technologies and/or business models to meet evolving market needs that will lead to the disruption of the large players.  Look today at the impact the natural & organic and vegan movements had on food and beverage companies like The Coca-Cola Company, General Mills, Kellogg’s, Campbell’s, etc.  Ignoring consumer preferences led to the death of the “center of the store” at grocery retailers.  In spite of claims to the contrary during the pandemic, I highly doubt that consumers will return to unhealthy foods permanently.  Similarly, the legacy auto manufacturers like GM and Ford’s resistance to electric vehicles, enabled opportunities for Tesla, Rivian and a host of others.  Protecting the dealer model and its reliance on revenue from the ongoing service of vehicles led GM to kill the electric car in the late 1990’s (remember the EV1?).  

Ultimately, a company’s long-term success depends on how well it rides up the consolidation curve.  Speed is everything and management’s acquisition competence is paramount.  The companies that capture critical ground early and move up the consolidation curve the fastest will be the most successful.  Slower companies (or worse those who stay out of the contest) will eventually be acquisition targets and will likely disappear.

So where is your industry in this cycle? Is it

• Highly fragmented and major players are only beginning to emerge?
• Projected to grow at 20% or more per year for the next five years?
• Starting to see some companies begin to make acquisitions and players are jockeying to be among the first players in the industry to capture additional technologies and capabilities to drive differentiation, customer retention and profitability?

The time is right for an aggressive consolidator in when a player can leverage / exploit:

• New technologies that can:

Redefine products or services

Add scope of products or services

• New regulatory initiatives that may change the playing field
• Economies of scale that are only available to larger companies

Information benefits

Increased bargaining power

Enhanced profit opportunity

Access to financial markets (bank financing, lines of credit, etc.)

• Interest from the capital markets in your industry as it moves from nascent to mainstream. 

Industry consolidations follow a predictable pattern.  The companies that will win long-term are attuned to the signs that their industry is moving from one stage to the next in the cycle.  They develop an acquisition plan, build the required capabilities and move aggressively to become one of the top three players in their field.  Failure to do ignore the cycle and its warning signs will inevitably lead to acquisition or demise. In short, eat or be eaten.