What is 'Business Consolidation'

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.

Breaking Down 'Business Consolidation'

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.

RELATED TERMS
  1. Consolidate

    To consolidate is to combine assets, liabilities, and other financial ...
  2. Consolidated Financial Statements

    Consolidated financial statements are a merging of the statements ...
  3. Consolidated Mortgage Bond

    A consolidated mortgage bond is one that consolidates the issues ...
  4. Consolidation Phase

    Consolidation phase is a stage in the industry life cycle where ...
  5. Debt Consolidation

    Debt consolidation is the act of combining several loans or liabilities ...
  6. Business

    A business is an entity that is involved in commercial, industrial, ...
Related Articles
  1. Trading

    Technical Buy Points on High-Flying Stocks

    A look at where to consider buying these strong stocks that recently started pulling back.
  2. Trading

    3 Stocks Channeling Higher and In the Buy Zone

    Trending higher overall, and trading near support following a pullback, these stocks are in the buy zone.
  3. Financial Advisor

    Acquire a career in mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  4. Small Business

    Why Successful Business Owners Sell Out

    Learn the motives that drive companies into the arms of an acquirer.
  5. Small Business

    The 4 Most Common Reasons a Small Business Fails

    Discover the most common reasons small businesses fail, including capital formation, management concerns, planning issues and marketing missteps.
  6. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  7. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
  8. Personal Finance

    Debt Consolidation Made Easy

    Five steps to consolidate and pay off your debt.
  9. Trading

    Short-Term Breakouts Point to Higher Prices in These Stocks

    These stocks are all in uptrends and recently broke out of short-term consolidations, signaling another up wave.
RELATED FAQS
  1. How do I identify a stock that is under consolidation?

    Discover the three major characteristics stocks or securities exhibit when they are trading under a period of price consolidation. Read Answer >>
  2. What's the difference between debt consolidation and debt settlement?

    Learn the differences between negotiating a debt settlement with your existing creditors and applying for a new consolidation ... Read Answer >>
  3. What happens during the consolidation phase of an investor's life cycle?

    Unlike the accumulation phase – where emphasis is placed on growing wealth – the consolidation phase is a balance between ... Read Answer >>
  4. Why do companies merge with or acquire other companies?

    The reasons for company mergers and acquisitions include synergy, diversification, growth, improving competition, and supply ... Read Answer >>
  5. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center