This command changes the cursor to the 'Compress/Uncompress' icon. If you click on an interior branch, MEGA will prompt you to give a name to the group that will be formed. It then will compress all the lineages defined by this branch into a solid elongated triangle whose thickness is proportional to the number of taxa condensed. Clicking on the branch again will uncompress it.
The cursor may be reverted to the arrow by clicking on the arrow icon on the left hand side of the Tree Explorer.