Consolidation Definition

In business, the word “consolidation” generally refers to the process of combining different departments of a company into one larger unit or combining two separate companies into one.

Reasons for Consolidation

There are many reasons why a company may want to consolidate different parts of its business. The main benefit of consolidation is efficiency. Generally, a corporate machine can run more smoothly and more efficiently with fewer moving parts. There’s also a cost savings that can occur when departments are consolidated; consolidation can eliminate redundant staff, locations, supplies, and procedures. But this also highlights one disadvantage of consolidation: when multiple departments are combined, 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 realm of mergers and acquisitions, where one company decides to purchase another, and the two entities consolidate their businesses. When this occurs, different departments of the target business may be dissolved or sold to another company. 

When a larger company buys out a smaller company, it’s not uncommon for the larger company to want some aspect of the smaller company: a special product, manufacturing procedures, or even a specific brand the smaller company holds. In a consolidation, those desirable aspects of the smaller company would likely be maintained.

Benefits of Consolidation

There are many advantages to consolidation. Here are some reasons why 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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• Merger Definition
• Dissolve Definition
• Dissolution Definition
• Statutory Merger Definition
• Takeover Definition

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