Last editedOct 20202 min read
In business, the whole is greater than the sum of its parts. That’s the central idea underpinning the concept of business consolidation. If successful, a consolidation plan can lead to the creation of powerful multinational corporations. Find out everything you need to know about business consolidation, starting with our consolidation definition.
Business consolidation refers to the practice of combining several business units of companies into a larger organisation. In other words, it’s when two companies (or more) merge and become one. Many of the world’s largest corporations were formed by business consolidation, while more recent examples include Facebook’s acquisition of Instagram and Disney’s acquisition of Fox.
While business consolidation is most commonly associated with mergers and acquisitions (i.e., smaller businesses combining to produce a new and larger entity), there are a couple of other forms of business consolidation, which we’ll explore in the next section.
Types of business consolidation
Although business consolidation is relatively straightforward, in practice, there are many different types of business consolidation plans. Here are some of the most common forms of business consolidation:
Statutory merger – This refers to an acquiring company liquidating the assets of the company it purchases, before dismantling the target company’s operations or incorporating them into their business. While the acquiring company survives, the acquired company ceases to exist.
Statutory consolidation – This refers to businesses combining to create a new, larger entity. In this form of business consolidation, the original companies will cease to exist.
Variable interest entity – This refers to an acquiring entity owning a controlling interest in a business despite not having the majority voting rights.
Stock acquisition – This type of consolidation plan refers to an acquiring company purchasing a majority share in another company, i.e., over 50%.
The type of consolidation strategy that your business pursues is likely to be determined by the desired outcome of the merger.
Pros and cons of a business consolidation plan
There are many benefits associated with pursuing a business consolidation strategy.
Firstly, it’s a great way to reduce a company’s expenses – over the long-term – via economies of scale. The larger organisation may use its size to demand better terms from suppliers or obtain financing, while business consolidation plans can also lead to greater market share. Furthermore, the effects of business consolidation, such as establishing uniform procedures, lowering overheads, and eliminating redundancies, can improve operational efficiency. Providing smaller businesses with the opportunity to reach a more extensive customer base, a consolidation strategy can be precisely what’s needed to take a promising company to the next level.
However, there are some limitations to the consolidation process that it’s a good idea to consider.
There are hefty costs associated with business consolidation, particularly if one of the merging companies needs to be liquidated. It’s also important to remember that cultural and operational differences between the two firms (for example, situations where a larger, more traditional company acquires a dynamic start-up) could mean that it’s time and cost-intensive to integrate the two companies. If the company cultures of the two entities are diametrically opposed, the consolidation process is likely to be significantly more challenging.
Bottom line: while there are extensive benefits associated with the consolidation process, it’s important to remember that business consolidation is a drastic undertaking and should only be pursued after a lengthy evaluation process to determine whether it’s the right move for your firm.
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