What do industry consolidations mean for SMEs?

Cost pressure, growth potential, new technologies or economies of scale can call existing business models into question. Competitive pressure exerted by players such as platform companies can transform entire industries. When the market structure begins to shift, mergers and acquisitions (M&A) become more frequent in certain market segments. Following this wave of consolidation, market share becomes concentrated in the hands of fewer, but larger market players than before. The number of companies continues to decline until the once-fragmented industry has consolidated. Mergers and acquisitions involving large companies attract more attention than those involving small and medium-sized enterprises (SMEs). However, M&A transactions are more common among SMEs.

In a horizontal merger or integration, two companies in the same industry with similar product lines merge to gain greater market power. This occurs, for example, when a company purposefully acquires small competitors and consolidates their operations (roll-up strategy). In vertical integration, companies merge along their supply chain to secure added value in-house from suppliers (backward integration) or customers (forward integration). This gives them greater control over the market and more opportunities for optimization. When companies from different industries join forces to diversify their business risks, they form what are known as conglomerates.

After reaching record highs in the early 2020s, the number of transactions in Switzerland in 2024 was on a par with the average of the past ten years. The total value of these mergers and acquisitions – in which at least one Swiss company was involved as a buyer, seller, or acquisition target – rose by nearly 60% in 2024 compared to the previous year, reaching USD 115.1 billion.

Growth and the associated economies of scale are the main drivers of consolidation waves in the IT industry. On the buyer side, the main players are large IT companies that acquire resources and market share through acquisitions, or financial investors who use buy-and-build strategies to merge several small and medium-sized companies into one major entity. Mergers and acquisitions offer advantages for providers: while smaller companies benefit from the acquiring company’s larger distribution network, buyers are more interested in the expertise and specialized workforce of the acquired company. Synergies and economies of scale boost the company’s position in a rapidly evolving market. It is not uncommon for the proceeds from sales to be reinvested in new business ideas, which helps revitalize the IT market from the ground up.

The IT industry is currently experiencing high market momentum due to ongoing digitalization and the development of new technologies such as artificial intelligence (AI), cloud computing, blockchain and cybersecurity. In 2024, the transaction volume in the technology, media and telecommunications sector reached a ten-year high following several major deals. Software companies, in particular, were on a path toward consolidation.

Consolidation in the healthcare industry is driven not only by growth but also by efficiency and cost considerations. Demographic change is associated with high healthcare costs. A shortage of skilled workers, stricter regulatory requirements and increasing cost pressures are compelling more and more service providers to merge. Groups are frequently formed between doctors’ and dentists’ practices, for example, or between hospitals, laboratories and fitness center chains. This results in more effective cost management, for instance by coordinating purchasing, sharing administrative tasks and pooling resources. Mergers can also help optimize investment costs for service providers who need expensive equipment, such as X-ray clinics, and better use can be made of capacities and resources.

In some independently run practices, the issue of succession remains unresolved because there is no interest among family members or within the practice itself. As they get older, many owners therefore consider selling their practice to a larger medical center or chain of clinics. For them, M&A offers a succession solution. Other key players in the consolidation of the healthcare sector include financial investors, who expect to generate high returns by developing and subsequently selling efficient, growing healthcare providers. However, differing regulatory requirements in individual countries impose certain limits on international expansion and economies of scale. Overall, the pharmaceutical and life sciences sector ranked third in terms of the number of M&A transactions in 2024, behind the manufacturing and IT sectors.

Company mergers and acquisitions in the construction industry (building and civil engineering) mainly occur due to the shortage of skilled workers and age-related succession issues. Synergy effects also play an important role in the construction industry. This applies both to vertical mergers along the value chain and to horizontal mergers with competitors.

The growing demand for sustainable, energy-efficient building solutions is also prompting transformation in the industry, while investors are attracted by digitalization as a growth trend. Drones for construction site inspections, connected building management systems and 3D models (Building Information Modeling – BIM) are just three examples of how new technologies are making inroads into what is often regarded as a traditional industry. Finally, new companies are constantly being established in the construction sector, as barriers to entry are relatively low, particularly in the ancillary building trade. This creates new acquisition targets for consolidators in the industry.

The wave of consolidation has been underway for several years now. There have already been numerous mergers and acquisitions in several related construction sectors, such as electrical installations and facility management.

Consolidation is taking place in your industry even without your involvement. If competitors make acquisitions, growing and becoming more efficient as a result, your small business may find itself under pressure to respond. Not every acquisition pays off for the acquiring company, as it can also create uncertainty among employees, tie up resources and lead to personnel changes. 

Nevertheless, as a business owner, you must ask yourself whether you can take advantage of market consolidation for your company. Experience shows that companies that actively embrace and shape change are the ones that benefit. This could mean taking on a business development role yourself, divesting non-core business units, merging your company into a larger group or continuing to focus on independent organic growth.

If you want to actively capitalize on market trends, you should consider their impact on your business and yourself as an entrepreneur well in advance – for example by conducting a strategic assessment at both corporate and owner level. Before making a decision, you should examine not only the opportunities, but also the specific risks involved in acquiring another company (post-merger integration). Even the integration of different IT systems involves a significant amount of effort, which can ultimately lead to failure. In addition, there may be internal conflicts among staff if the corporate cultures are not compatible. There is also a risk that while you may be able to take over a company, you could find yourself unable to win over its customers.

Whether you’re acting as a buyer or seller in a merger, looking for strategic partners or prefer to grow organically in a niche sector: as the largest commercial bank in the Swiss market, we have a deep understanding of the challenges companies face. We will be happy to assist you with buying or selling a company or advise you on succession planning.