What Is the Consolidation Phase?

The consolidation phase is a stage in the industry life cycle where competitors in the industry start to merge with one another. Companies will seek to consolidate in order to gain a larger portion of overall market share and to take advantage of synergies. Each of these items can increase top line revenue and company valuation in order to improve corporate fundamentals and make shares of their stock more attractive to investors.

Key Takeaways

  • The consolidation phase is a later part of the industry lifecycle when companies in the same sector begin to acquire and merge with one another.
  • This is done after growth opportunities for individual companies become sparse, and financial standing can only be improved through combination.
  • The phases of the industry life cycle are the introduction, growth, maturity, consolidation, and decline.

Understanding the Consolidation Phase

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 no longer in its growth phase. It often has the effect of making a company more attractive to investors.

Say the video game industry is starting to mature, and as a result individual gaming companies begin to acquire other video game makers and join together to form larger entities; this would be an example of a consolidation phase for the industry.

The Industry Lifecycle

Consolidations and mergers occur late in the industry lifecycle. The phases of the industry life cycle are introduction, growth, maturity, consolidation, and decline.

During the introduction phase, 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.

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Image by Sabrina Jiang © Investopedia 2020

Example of Industry Lifecycle Analysis

There was a boom in social media during the early 2000s due to the success of Myspace, a social networking site that surpassed Google as the most visited place on the Internet in 2006. Sites like Orkut (a Google venture) and Bebo competed to gain users in a crowded landscape. Facebook, which had started in 2004, was also fast gaining traction among universities and was considered the second most popular social media site. There were signs of consolidation when Myspace was acquired by Rupert Murdoch's Newscorp. Ltd. for $580 million in 2005.

But that valuation turned out to be inflated after Facebook overtook MySpace in rankings. MySpace eventually petered into insignificance after Facebook became a social media behemoth. With the exception of a few, like Twitter, other social media sites also fell by the wayside. The social media sites that survived made a thumping debut on the stock market. Their valuations were considered high in comparison to their revenues, mainly because investors expected significant growth in the future as social media became popular throughout the world.