A consolidation primarily takes place to initiate an increased operational efficiency and reducing redundant personnel and process. Apart from that, the following are the reasons for the consolidation of businesses:
Access to advanced and new technology and skills.
To run their operations more effectively and efficiently.
To eliminate competition for their businesses as well as customers from the market.
Access to more customers and a new market for their products and services.
Increasing the chance of innovation and new products or line of products.
It creates cheaper financing choices for large businesses.
The new business can yield increased revenues and profits.
Expansion of business to new geographies.
Improvising and streamlining management and decision-making.
Saving of resources, manpower, capital, and utilization of funds by reinvestment.
While consolidating business, one should also consider the cost of the process associated with and not only the above-mentioned reasons for the consolidation.
Types of Consolidation
A business consolidation can be of different types as like different kinds of business, depending upon the nature of the business, the strategy involved, and the desired outcome.
Statutory Consolidation: A statutory consolidating takes place through a merger, under the businesses join forces to build a new and massive corporation and the original entities cease to exist.
Stock Acquisition: Under this type of consolidation, the acquiring company purchases the majority stock or controlling interest. In order to hold a majority position, the acquirer is required to purchase more than 50% of the target companyâ€™s share.
Statutory Merger: The acquirer liquidates the assets of the target organization, after which the acquirer dismantles the target companies management and operations and incorporates their own into them. The acquired company ceases to exist, and unlike statutory acquisition, the acquirer company keeps operating.
Variable Interest Entity: Even if the acquiring company does not have majority voting rights but owns the controlling interest in a company, it is called a variable interest entity. While these are generally established as special purpose vehicles.
Advantages and Disadvantages of Consolidation
There can be both pros and cons of consolidation of business, depending upon the nature, structure, and strategy of the businesses involved.
A few of the advantages of consolidation are the following:
Consolidation of business provides stable business opportunities as the business is turned into a larger form, which also results in the acquisition of more assets to utilize collateral.
The revenue generation and profit-making capacity of the new business increase at low-cost financing.
It also helps the businesses to expand their geographical reach to acquire more customer base and enter bigger markets.
Consolidating an old and established technology-based organization with that of a new startup venture will yield benefits to the newly formed organization in terms of skills, experiences, knowledge, etc.
It is easy for a large organization to attract investment, obtain financing for the business, and also helps in demanding better terms from the suppliers as well.
Through a business consolidation, it makes it easy to establish uniform procedures, lowering overheads, eliminating redundancies, which results in improved operational efficiency.
With a bigger customer base and geographical reach, a stable business consolidation can also introduce new product lines or services.
With advantages, consolidation of business has certain limitations as well, following are the few disadvantages of consolidation:
There can be cultural differences as well as opinion clashes among the companies being merged. For instance, a small entity being merged with an older and technically established company will result in the exchange and transfer of knowledge, experience, and skills but will also result in clashes of opinions.
With regards to management, an older established firm would prefer a strict managerial system and corporate hierarchies, whereas newly based startup ventures may prefer fewer administrative authorities over operations.
Though having a long-term impact on businesses, like low-cost financing and investment and increased revenue and profits, consolidation does hamper the economy, which leads to redundancies at the workplace, resulting in layoffs and unemployment.
If a small business has greater debts and loans, even though the synergies of the organizations are compatible, it will be an issue for the newly formed business as it will increase its debt loans.
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