20 Jul Merge or Die: How Competitors Become Allies and How Recessions Consolidate Industry Power
No industry continues into infinity without major aberrations, especially those involved in technology or growth. When consolidation follows growth, enemies become friends and bitter rivals can find healthy new profits in strategic (and might I say legal) collusion through M&A.
As has been said in the past, slow-growth is often a necessary impetus for M&A. In some cases, specific company contraction or overall industry shrinkage can contribute to an increased need for M&A. In such cases, timing and connections will be important for some lower middle-market companies–and especially for their management. What follows is a discussion on some of the positives and negatives of strategic M&A, how timing plays a key role in the process (especially during recessions) and how M&A is good in the VERY long term at consolidating power and creating market leaders with a clear vision and direction of where an industry is headed.
Are the Glory Days of M&A History, Dead and Gone?
Martin Lipton of longstanding Wachtell, Lipton, Rosen & Katz makes the following observation of recent developments in the world of M&A:
Today, Lipton observes an M&A business that is struggling to recover from the financial crisis. Business is slow. Around him voices have begun to murmur that the modern era of M&A –the age of…raiders, greenmailers, activists and arbitrageurs; of private equity titans and daisy-chain transactions–might be over. Gloom prevails.
The attitude of gloom and doom is much more broad than the world of M&A. Many across the financial markets have worried of double-dips or the next great drop in the market would could take away opportunities for consolidation in the future.
What about the next recession?
Along with the last recession, which included several years of completely dry deal-flow for nearly everyone in the financial sector, many finance professionals are leery and hesitant about another recession on the horizon. And they should be. Market volatility of recent vintage has proven much crazier than what was seen in the not-to-distant past. There will be a next recession. The financiers of the world certainly worry for them. The buy-siders long for them (that’s when the sharks come out to feed). You have to plan and prepare for them. Most industries would hope consolidation occurs before a recession hits or forces consolidation before its time.
Scale must be the solution…
Recessions are a double-edged sword. They kill off many smaller businesses and business models–which is painful for both families and individuals. On the other hand, they’re the ultimate capitalist form of “cleansing.” They remove the businesses and operators with sub-par models and methods of operation. Consolidation through M&A can be an important part of the scaling-up process and help to solidify market power in a few, important leaders within any particular industry. Unfortunately–and, as we’ve seen in the past–it can also be the very reason we get such institutions that are too big to fail.
Collusion between former industry competitors
Such industry consolidation also creates a great vacuum for competition within an industry. For firms and individuals who were once at each others’ throats in competition over customers, IP, ideas and employees are now in collusion with their former foes. Newly won allies within a market can quickly consolidate power and can be highly detrimental on the remaining market operators. Those who’ve not taken advantage of an industry’s “winding up” can be left exposed to the elements. When once there were many more operators to provide the competition necessary to assuage the power of suppliers and buyers, now consolidated power in a larger merged conglomerate can create difficulties for the fledgling survivors.
We rarely suggest directly seeking competitors in the process of selling a business, but the competitors within your industry are often the best acquirers: they’re the ones willing to pay more and who can gain a major strategic advantage from acquiring similar firms–for some of the very reasons I’ve just discussed. The solution is never concluded with a simple answer. Timing, internal strategy, macro and industry forces at large will help determine what to do in a potential bet at consolidation. If you’re not careful you can hit the M&A train in industry consolidation either too early or too late, neither which bodes excellently well for the seller.
But, in most cases the opportunity is highly depended on the individual firm. Is it the right move for the firm based on current performance? Is growth on the horizon or will consolidation help to prevent an ultimate collapse of the business? Is competition so fierce and internal distrust among industry professionals so high that doing a deal might cause more detriment than support? The right answer is –as almost always is the case–going to be in the eye of the beholder. There are several certainties throughout this process:
- M&A can be helpful or hurtful, depending on how the shake-out occurs between individual firms, the industry at large and the players within the companies themselves.
- Consolidation through M&A often means consolidation of power and can prove the death of remaining competitors within an industry. This could be true of global M&A or even simple local firms within a region, state or city.
- Buyouts within a market create leverage for the remaining players. Leverage that can be used to do more deals more rapidly. You’ll notice that an industry wind-up builds steam and reaches a crescendo.
- Failing to merge may prove the death of smaller operators within a market. Merging appropriately may be the very best thing two companies do. There’s really not gray area in M&A: there are winners and losers.
- Timing plays a more important role in this process than perhaps any other factor (besides who you know)
When it comes time to perform your next deal, it’s important to consider the macro and micro factors that will play a role in your M&A strategy. There are too many factors out of your control in deal making that put the risk outside of where most shareholders like to play. In a world of eat or be eaten, it’s best to have an advisor who knows where to play, how to play, with whom to play and WHEN is the best time to strike.