What is the Consolidation Phase
The consolidation state is a phase in the industry or company life cycle where segments in the company or competitors in the industry start to merge. Companies often consolidate to gain a larger portion of overall market share and to take advantage of synergies. Each of these items can increase their top line revenue and company valuation in order to juice their fundamentals and make their stock more attractive to investors.
Consolidations and mergers are usually sought after as a form of inorganic growth when the organic growth phase of industry formation has passed. Companies often merge or consolidate segments in order to cut down on costs, achieve more efficient operations or discontinue product lines that are not performing as well as others. This is done when a company has matured and is not longer in its growth phase. It often has the effect of making a company more attractive to investors.
BREAKING DOWN Consolidation Phase
Consolidations and mergers occur late in the industry life cycle. The phases of the industry life cycle are introduction, growth, maturity and decline. During introduction, a company or many companies may be working hard to introduce a new product or service into the mainstream. During the growth phase, the new product or service has caught on and companies involved in creating or delivering the product or service are experiencing large amounts of organic growth as demand for their product increases. This is where lots of new companies enter the industry. In the mature phase, there is usually a shake-out of successful from unsuccessful companies. In late maturity, companies may begin to consolidate as organic growth slows and they look for ways to increase their market share and juice their growth.
Let's say the video game industry is starting to mature, and its companies start to acquire other companies and join together to form larger entities; this would be an example of a consolidation phase for the industry.