What Is Business Consolidation?

The term business consolidation refers to the combination of several business units or different companies into a single, larger organization. Business consolidation is used to improve operational efficiency by reducing redundant personnel and processes. Business consolidation can result in long-term cost savings and a concentration of market share, but in the short-term can be expensive and complex.

Key Takeaways

  • Business consolidation is a combination of several business units or companies into a single, larger organization.
  • The reasons behind consolidation include operational efficiency, eliminating competition, and getting access to new markets.
  • Consolidation can lead to a concentration of market share and a bigger customer base.
  • Some of the disadvantages of consolidation include dealing with cultural differences between firms and potential issues with personnel.

Understanding Business Consolidation

Consolidation happens when two or more companies merge to become one. Also known as amalgamation, business consolidation is most often associated with mergers and acquisitions (M&A). This often happens when several similar, smaller businesses combine to form a new, larger legal entity. In most cases, the smaller entities that are acquired cease to exist. Other kinds of consolidation are explained further on.

Combining multiple companies or business units into a brand new company is the most drastic option. This can be an expensive proposition if one of the merging companies is liquidated, and can carry additional costs associated with creating a new brand. But businesses that want to consolidate their operations have other options at their disposal. Another option for business consolidation involves moving smaller operations into an existing company that does not intend to be dismantled.

The reasons behind consolidation vary, and there are many. They include but aren't limited to:

  • Operational efficiency
  • Eliminating the competition for customers and/or resources
  • Access to and expansion into new markets
  • Innovation and new products
  • Cheaper financing options for bigger businesses
  • Shared operations

Regardless of the rationale, businesses can't—and shouldn't—take the decision to consolidate lightly. Not only are the costs to consolidate hefty, but there are also other things to consider. For instance, executives and other key personnel have to satisfy shareholders' concerns, they must consider what happens with redundancies in the workforce, whether to sell assets, and how to market and brand the new company once the whole process is complete.

The decision to consolidate shouldn't be taken lightly especially since the related costs are very hefty

Types of Business Consolidation

Just like company types, there are many different kinds of business consolidation. It all depends on the strategy, the desired outcome, and the nature of the businesses involved. They fall into a few categories that are listed below.

Statutory Consolidation

When businesses are combined into a new entity, the original companies cease to exist. By combining these businesses together, they create a new, larger corporation. This is called statutory consolidation, which is normally done through a merger transaction.

Statutory Merger

This kind of business consolidation takes place when an acquiring company liquidates the assets of a company it buys. After doing so, the acquirer incorporates or dismantling the target company's operations. So, unlike a statutory consolidation, the acquiring company keeps its operations going, while the acquired entity no longer exists.

Stock Acquisition

This is a combination of businesses in which an acquiring company buys a majority share or a controlling interest of another company. In order for it to be a majority share, the acquirer must take out more than 50% in the target. In the end, both companies survive.

Variable Interest Entity

When an acquiring entity owns a controlling interest in a company that is not based on a majority of voting rights, it is referred to as a variable interest entity. These entities are normally established as special purpose vehicles (SPVs).

Advantages and Disadvantages of Business Consolidation

Pros

There are many advantages to combining two or more business entities together. Consolidated business can obtain cheaper financing if the newly formed entity is more stable, more profitable, or has more assets to use as collateral. The new company may also be able to use its larger size to extract better terms from suppliers because it will be able to buy more units. In addition, business consolidations can result in a concentration of market share, a more expansive product lineup, a greater geographical reach, and therefore a bigger customer base.

Cons

With the positives, there also comes a lot of negatives. Companies that combine operations must deal with cultural differences between firms. For example, merging an older, established technology company with a small startup company may achieve a beneficial transfer of knowledge, experience, and skills, but also may cause personnel to clash. In such an example, management in the older firm may feel more comfortable with operating under strict administrative hierarchies, while the startup company may have preferred less administrative authority over operations.