Industry Life Cycle in Mergers and Acquisitions

Different businesses can be at different stages of operation in a business lifecycle. Generally, there are four stages of business operation. They are:

  1. Introductory Phase
  2. Growth Phase
  3. Maturity Phase
  4. Decline Phase

These phases of business are determined by the sales it makes over the years. All these stages have some common characteristics related to investment, sales, cost, demand and product life stages.

Merger and Acquisition decisions are highly impacted and vary due to the target’s or acquirer’s phase of the industry life cycle. M&A strategy for a target business in the introductory phase will be different than M&A strategy at the maturity stage. Similarly, an acquirer at growth stage will have a different approach and intention to target company than an acquirer at maturity stage. The strategy and need of M&A will also be different based on the stages of business operation.

Mergers and Acquisitions Approaches and Industry Life Cycle

  1. Pioneering Phase:

Businesses are in the startup phase and are exploring the potential of the business. At this stage of operation, startup founders generally prefer full cash-out or partial sale of investment of their promising ventures by selling to larger companies seeking growth and expansion opportunities. Businesses at this stage prefer horizontal and conglomerate mergers.

  1. Accelerating Growth Phase:

Businesses at this stage generally have fast growing rates and high profit potential and are operating in a new segment, market of industries. Such businesses tend to sell their share of investment to more established companies for access capital for business expansion. They prefer horizontal and conglomerate mergers.

  1. Mature Growth Phase:

Businesses at this stage have a slow growth rate and have started losing market share. At this stage, acquirers look for targets that add value to their business or can assist in increasing economies of scale. In such a stage of business operation, businesses go for horizontal and vertical mergers.

  1. Industry Maturity Phase:

Acquiring industry has stagnant growth and growth rate is the same as the growth rate of the economy. The main purpose for M&A is to accelerate the economies of scale and to provide return opportunities to shareholders. Here, acquirers look for potential growing business.

  1. Decline Phase:

Decline phase has a shrinking economy, businesses are struggling and looking for synergies to sustain/survive business. Acquirer has a main focus on synergy or to share profit of acquired firms. In this phase, acquirers may go for any form of mergers that will fulfill the purpose i.e. horizontal, vertical and conglomerate.

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