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Wednesday, September 8, 2010

Consolidation: or one industry evolution which often repeats

from Megan Jones





All the lessons of history in four sentences: Whom the gods would destroy, they first make mad with power. The mills of God grind slowly, but they grind exceedingly small. The bee fertilizes the flower it robs. When it is dark enough, you can see the stars.
Charles A. Beard

This morning I was speaking with David Cremin of DFJ Frontier (VC) and drinking some excellent coffee. The topic turned at one point to industry consolidation.

My initial point had been that select media related spaces will likely consolidate at some point (and indeed are starting to do so). This theme has been a big one for me lately and its roots arise from the industry consolidations I saw early in my career as a tech banker in Menlo Park. A number of companies that I've spoken to recently have had a potential acquirer lurking nearby – whether or not they are interested in selling.

Why do emerging industries sometimes evolve quickly into consolidating ones?

1. Emerging industries that get press and attention tend to grow quickly, have large markets, attract talented people, have multiple and iterative stages of evolution and scale. All of those factors also enable easier funding – either from business partners or venture capitalists.

2. Sometimes, as a result, they get over funded with multiple VC firms each owning a like company (and all of these heavily funded companies must slug it out in a fast moving, ever changing business sector to win market share).

3. New industries or business segments are hard to build. Business models are often based on precedent: like industries that targeted similar customers and monetized in related ways. In other words, you guess a lot, hopefully making reasoned guesses. A lot of mistakes are made (and some companies blow up) as a workable business model develops through trial and error. Google wasn't the first search engine.

4. To build market share faster some companies wisely merge. This action can enable economies of scale, a better customer experience (more offerings; better geographical reach; better or deeper management team) and add audience/customers. Should the public markets be open the merger could create an entity large enough to go public; thereby becoming better funded than competitors.

5. The market can only support so many like companies (and it's better to sell what's left of a beaten company and realize some value from what you've built than none).

6. Buying something (capacity; products; customers; geographies) takes less time and money than developing it does. This factor can also lead to larger public companies buying into a new and emerging sector.

7. Selling later in the consolidation stage is often not as lucrative as selling earlier. The first companies snapped up typically get more resources to build their presence in the industry, giving them an advantage (and harming those that remain independent). The holdouts need to execute very well to maintain an early leadership position.

8. VCs may push for a sale to ensure that their portfolio company partners with other stronger sector players and they get a good return.

Other reasons do exist, including factors unique to different industries and companies.

For any industry in which scale, often ideally built quickly, is important (most) – such as media or (often) consumer technology – consolidation concerns are very relevant. What would you do if your biggest competitor was bought by a Fortune 100 company? Winning over a customer already dominated by a better funded and more established company can be a losing proposition. Best to seize your advantage early on once the consolidation winds start blowing.

Megan Jones is Director at Hadley Partners Incorporated. Ms. Jones has been advising start-up and more established companies for 19 years. Her expertise includes mergers and acquisitions, restructurings, divestitures, strategic partnerships and capital raising. She has also consulted with private equity and venture capital firms and hedge funds. Her current focus is on digital media, high-tech and Internet-related industries, in particular on identifying emerging trends and technological or market shifts. Prior to joining Hadley Partners she worked for Needham & Company, Merrill Lynch, Lazard Freres and Ernst and Young. Ms. Jones' novel, Captive, is being released in October 2010. Megan's blog is at http://www.hadleypartners.com/InReelTime.


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