It is essential for startups to understand where their industry lies on the consolidation lifecycle, and adapt accordingly

Consolidation is a natural and necessary phase for any industry, as companies compete for growth and market share, whether it is more revenue or users.

Recently, there has been a lot of conversations (and predictions) about the M&A activity in Asia’s tech industry. At a panel discussion on Startup M&A at Echelon Malaysia 2017, one of the questions asked was, “Why aren’t tech companies being acquired or consolidated in Asia?”

My response was that it depends on which stage of the consolidation life cycle the industry is at. For tech, each vertical is an industry on its own. As such, one should not approach consolidation as a ‘one-size fits all’ in tech, as some industries (e-commerce) are further along the consolidation path than others (robo-advisors).

In a study of 1,345 large mergers globally over 13 years, the Harvard Business Review (“HBR”) has found that industries progress predictably through a clear consolidation life cycle.

Recognising which stage your industry is in, and factoring it into your strategy, is critical. It will affect the outcome of your company.

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According to HBR, there are four stages of the Industry Consolidation Life Cycle where M&A activity will vary. I will illustrate these 4 stages with examples from the tech industry.

Stage One: Opening

The cycle starts with a single startup in a new market. The opportunity attracts new players who quickly enter the market, resulting in fragmentation.

The robo-advisory space in SEA — with startups and spin-offs from major financial institutions — are an example of a vertical that is currently at this stage.

At this stage, companies focus on aggressively acquiring users and market share.

Stage Two: Scale

This stage is about pushing for quicker scalability through inorganic methods. Bigger players will buy up competitors. The industry will consolidate rapidly, and the top three players will start to emerge.

India’s e-commerce sector is an example of an industry in Stage Two. The industry has seen a series of acquisitions, mergers, and shutdowns. Flipkart’s acquisition of electronics retailer Letsbuy.com in 2012 — for an estimated US$25 million — was a sign of the start of consolidation.

India’s tech sector has gone through a wave of M&A in the last few years with a majority of them being e-commerce deals. Snapdeal acquired the online recharge platform FreeCharge in 2015 for an estimated $400 million. In 2016, Flipkart acquired Jabong at $70 million through its fashion arm Myntra.

In Southeast Asia, certain verticals within the tech sector — including e-commerce — are already showing signs of moving into the consolidation phase.

Alibaba’s acquisition of Lazada (followed by Lazada’s acquisition of Redmart) is a clear indication of Stage Two. The Chinese Internet giant, through Lazada, will continue to consolidate assets it needs to dominate the Southeast Asian e-commerce space.

Stage Three: Focus

The bigger companies that have emerged from Stage Two will focus on expanding their core business and aggressively try to outgrow their competition.

Mega deals and large-scale consolidation will take place. The ride-sharing industry is currently at this stage with Uber expanding into food delivery via UberEATS.

Uber and Didi also consolidated in 2016 in a US$35 billion deal with Uber taking a 20 per cent stake in Didi.

Stage 4: Balance and Titans

At this stage, titans control the industry. Companies in this juncture have to defend their position by finding ways to grow their core business and create new growth drivers.

Google restructuring into Alphabet is an obvious example of that. With growth in search advertising slowing, the new corporate structure allows its various moonshot companies, from longevity search to drones, to operate independently and move faster.

The Consolidation Curve Strategy

Every company in every industry will go through these four stages either as a single entity or as part of a combined entity.

With innovative and disruptive technologies, the rate of the cycle will get increasingly shorter. Therefore, it is important that a company’s strategy aligns with the stage of its industry.

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Companies need to account for these external factors in their strategy in order to move up the consolidation curve, particularly in Stage Two and Three, which are periods of fierce competition and high M&A activity.

The company that captures critical mass and move up the curve fastest will win, and slower companies with fewer resources will either be acquired or disappear.

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Reference: The Consolidation Curve by Harvard Business Review December 2002

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