Consolidation Definition

Learn more about what consolidation is in business.

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The definition of “consolidation” in business generally refers to combining different departments of a company into one larger unit or combining separate companies into one.

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Reasons for Consolidation

There are many reasons why a company may want to consolidate different parts of its business. The main consolidation benefit is efficiency. The corporate machine runs more smoothly and more efficiently with fewer moving parts. There is also a cost savings that can occur with consolidation of departments due to the elimination of redundant staff, locations, supplies, and procedures. But this also highlights one of the consolidation disadvantages: when multiple departments are joined, sometimes redundant employees have to be let go.

Consolidation can be done within a company, but it can also be performed throughout a larger organization, such as when a parent company consolidates various companies under its corporate umbrella. Another consolidation example is when two separate companies consolidate after one buys the other.

Consolidation of Separate Companies

Consolidation can also happen between two separate, independent businesses. This is more often seen in the mergers and acquisition realm where one company decides to purchase another and the two entities consolidate their businesses. When this occurs, there could be different departments of the target business that will be dissolved or even sold off to another company.

When there is a buyout of a smaller company by a larger company, in many instances the larger company wants some aspect of the smaller company to compliment itself, whether it be a special product, manufacturing procedures or capacities, or even a specific brand that the larger company believes would compliment their own business.

Benefits of Consolidation

There are many consolidation advantages. Here are a some reasons why a two companies may decide to consolidate:

Increased efficiency of the business
Eliminates competing companies, which increases sales
Access to new products, processes, manufacturing procedures, and markets
Innovation and new products
Increased ability to obtain business loans and capital for investment in the business
Shared operations
Increased revenue with increased profits

The bottom line is that consolidation of company units or even separate businesses may lead to increased efficiency and profits. But it’s still a significant undertaking and shouldn’t be taken lightly.

Types of Business Consolidation

There are many ways that two or more companies can consolidate. Which system and process to use will depend upon the circumstances, the types of businesses, and the goal of the acquiring company. Here are some of the most common forms of business consolidation:

Statutory merger. This refers to the liquidating of some portion or all the assets of the target company. Usually, in this scenario, the target company no longer exists after the acquisition.
Statutory consolidation. This type of consolidation is where two companies combine to an altogether new entity that uses the positive aspects of both companies to create a completely new corporation, all with a new name, departments, and potentially even products and services.
Variable interest entity. This type of consolidation is when a company purchases enough stock of a separate company to own a controlling interest in the target company, but the acquiring company may not have enough voting shares to affect major change within the target company. With this process, both companies remain in existence.
Stock acquisition. This is similar to the variable interest entity, but the acquiring company purchases enough voting shares to affect change in the target company.

The type of process and strategy used will be dictated by the acquiring company’s reasons for deciding to acquire the target company.

Summary

Consolidation is when different departments of a company (or different companies) are combined to form one, larger unit. This is often done for the business to be more efficient and to save money.

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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.