What Does Business Consolidation Mean?
Business consolidation is the combination of several business units or several different companies into a larger organization. Business consolidation is used to improve operational efficiency by reducing redundant personnel and processes. Also known as an amalgamation, a business consolidation is most often associated with mergers and acquisitions in which several similar, smaller businesses are combined into a new legal entity and the original entities cease to exist. 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.
Business Consolidation Explained
Businesses seeking to combine operations have several options at their disposal. The most drastic option is to combine multiple companies or business units into a brand new company. 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. Another option for business consolidation involves moving smaller operations into an existing company that is not intended on being dismantled.
Business consolidations fit into a few categories. They include:
- Statutory consolidation: When businesses are combined into a new entity and the original companies cease to exist.
- Statutory merger: When an acquiring company liquidates the assets of a company it buys, incorporating or dismantling its operations.
- Stock acquisition: A combination that sees an acquiring company buy a majority share (more than 50% or common stock) of a company and 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.
Business Consolidation Advantages
Consolidated business can obtain cheaper financing if the consolidated entity is more stable, more profitable, or has more assets to use as collateral. It 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.
Business Consolidation Challenges
Companies that combine operations must deal with cultural differences between firms. For example, merging an older, established technology company with a small start-up 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 start-up company may have preferred less administrative authority over operations.