Legal Definitions - shakeout

A shakeout describes a period within a specific industry when less efficient, financially struggling, or less adaptable businesses are forced to close down, merge with larger companies, or significantly reduce their operations. This often occurs during times of intense competition, economic downturns, rapid technological change, or declining market prices, ultimately leaving stronger, more resilient companies to continue operating.

Here are some examples to illustrate this concept:

• Imagine the early days of the dot-com boom. Many internet startups emerged with ambitious ideas but lacked sustainable business models. When investor funding tightened and the market became more discerning, a significant shakeout occurred. Numerous companies that were "weak" in terms of profitability or viable strategies went bankrupt, leaving only a handful of more robust and well-managed tech firms to survive and thrive.

  This illustrates a shakeout because the less productive and financially unstable businesses were eliminated from the industry due to changing market conditions and increased scrutiny, allowing stronger companies to consolidate their position.

• Consider the market for home meal kit delivery services. Initially, many companies launched, offering various subscription models. However, as the market matured, competition intensified, and customer acquisition costs rose, several smaller or less efficient services struggled to maintain profitability. A shakeout ensued, leading to some companies shutting down, while others were acquired by larger competitors, leaving a smaller number of dominant players in the market.

  This demonstrates a shakeout as the intense competition and the need for economies of scale led to the elimination or absorption of weaker businesses that couldn't compete effectively on price, variety, or delivery efficiency.

• Think about the transition in the energy sector towards renewable sources. Many small companies initially entered the solar panel manufacturing market, hoping to capitalize on growing demand. However, as technology advanced, manufacturing became more efficient, and global competition from larger players increased, prices for solar panels dropped significantly. This created a shakeout where many smaller manufacturers, unable to compete with the lower costs and larger production capacities of established giants, were forced out of business or acquired.

  This example shows a shakeout because the declining prices and intense competition, driven by technological advancements and scale, led to the elimination of less competitive and less productive businesses within the industry.