The Strategies of Industry Consolidation
A Special Series from North American Wholesale Lumber Association
Consolidation has arrived in the forest products and lumber industry, and everyone is dealing with it. Mergers, acquisitions and hostile takeovers are constantly in the headlines.
There are numerous reasons behind this trend, including access to standing timber, reduced profit margins, stricter government regulations, and decreased housing construction.1 For mature industries such as ours, consolidation is almost inevitable. If we want to leverage this market opportunity, we must first understand the fundamental consolidation strategies.
According to the Harvard Business Review article “The Consolidation Curve,” most industries progress through a clear consolidation life cycle. The article explains that once an industry forms or once it is deregulated, it will go through four stages of consolidation: opening, scale, focus, and balance and alliance. The researchers who wrote the article—and analyzed 1,345 large mergers completed throughout a span of 13 years—predicted that an industry will take an average of 25 years to progress through these four stages. And in the future, they expect it to be even quicker.
Big players in the lumber market are starting to gain market share through the acquisition of smaller companies. An acquisition is simply the purchase of one corporation by another.
According to Entrepreneur, participating in acquisitions has become one of the most popular ways for a company to grow today. It said that since 1990, the annual number of mergers and acquisitions has doubled.
In addition to gaining increased market share, companies usually participate in acquisitions in order to be able to expand product lines (or get access to new, innovative products or technologies), and grow their footprint throughout the country, among other reasons. Most experts advise businesses to expand from their “home base” rather than to acquire companies across the country. In other words, it’s better for businesses to stay within their geographical footprint and then expand that footprint through acquisitions.
Aside from acquisitions, other common consolidation strategies include mergers and hostile takeovers. A merger happens when two companies join together to become one completely new business.
There are multiple benefits of growing through mergers, such as reduced expenses, access to a wider customer base as well as experienced and knowledgeable staff, reduction in competition, and diversification of products and services.
A hostile takeover is a very particular type of consolidation. It’s essentially an acquisition or merger carried out against the wishes of the board or the management of the target company.2 The purchasing company takes over the acquired business’s operation, usually introducing a new management structure and corporate philosophy. With a hostile takeover, the purchasing company has huge decisions to make and a lot of risks to face.
They have to consider: Is the company that they are buying healthy in its management and operations? And if so, will they operate as they have been, keeping the status quo? Or are the target company’s management and operations weak, and will they benefit from a new corporate philosophy and structure? Sometimes, this piece is the most difficult and can affect everyone involved—business owners and employees alike—because the target company’s identity may be changed drastically.
Ultimately, it comes down to the purchasing company’s philosophy and the strategy it is using to execute the purchase.
When discussing mergers and acquisitions in general, people often consider business tycoon and investor Warren Buffett’s M&A strategy. He buys strong, healthy companies that have great management, and lets those managers continue to run the company and simply offers them the support of a much larger corporation. Buffett has said he needs his managers to stay on for as long as possible.
Our industry, however, doesn’t always follow Buffett’s model. When companies purchase other companies, there’s a tendency to move most of the operations to the corporate office and set up branch or division managers to run the new acquisition.
While this approach could work for some, for others, it could hurt the business and affect future growth. Key employees could leave; the culture between the two companies could clash, causing tension between the staff, etc. But, of course, this is all a part of the risks that come with mergers and acquisitions and the possible results of industry consolidation.
Our industry is changing—evolving—just like so many others. It is crucial that we embrace the change and take strategic steps in our individual roles in creating a healthy, competitive landscape for the future.
– Anthony Muck is mgr.-customer support for DMSi, Omaha, Ne., and a member of NAWLA’s communications committee.
(Sources: 1State Impact,