Idea Generation: Buy the Consolidating Industry

There are a lot of ways to find great investments, but one that most people miss is looking at industries that are in the middle of getting smaller and more concentrated. This is called consolidation.

Consolidation usually happens after an industry has been doing really badly for a long time. When businesses are struggling, their prices drop. That gives the stronger, better-funded companies a chance to buy up their weaker competitors for way less than it would cost to build those same businesses from scratch. And when you buy out a competitor, you're not just growing, you're also cutting out a ton of wasted spending, like having two accounting departments or two marketing teams when you only need one.

The other thing worth paying attention to is the companies that are doing the buying. If a business survived a really rough stretch in a tough, competitive industry, that tells you something. It means the people running it actually know what they're doing. The companies left standing after a shakeout tend to be leaner, smarter, and better run than before, which makes the whole industry healthier and more profitable, even when times are hard.

This isn't just something that happens in old-school, boom-and-bust industries. It can happen anywhere. Take software, for example. Right now, the software industry is pretty spread out because so much money has poured into it. But imagine if software went through a rough 5–7 years where earnings were down and valuations kept dropping. The bigger, well-funded software companies would be able to go out and buy smaller ones at a huge discount, picking up their products and customers for a fraction of what those businesses would normally be worth, and then cut out all the overlapping costs. That's a really powerful position to be in.

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