“The whole is better than the sum of its parts” is a famous quote in the business world. It means something is more effective as a combined unit rather than individual effectiveness. For example, a team of skilled professionals is more effective than the same professionals working in an individual capacity.
The above-mentioned concept is the fundamental idea behind business consolidation. Business consolidation is amongst the types of mergers and acquisitions that aim to create business synergies. These synergies then create a bigger impact than two businesses operating individually.
Here is what you need to know about business consolidation, its benefits and disadvantages. Before that, it is important to understand mergers and acquisitions meaning.
Mergers and acquisitions definition
You might have noticed that mergers and acquisitions are often used collectively. But what are mergers and acquisitions? Let us define both one by one.
Acquisitions
Business acquisitions are processes in which one business (acquiring company) purchases another business (target company). The target company may or may not keep its identity and operate under the parent company. In any case, the parent company has authority over the target company’s assets and resources. It has authoritative control over the decision-making process in the target company.
Mergers
Business mergers are transactions in which two companies consolidate to create a new business entity. Consolidation means two companies combine their workforce, financial resources, assets, or even intellectual properties.
Business consolidation is often associated with M&As, and it is safe to say that it is one of the types of mergers and acquisitions.
Objectives of business consolidation
These reasons behind business consolidation may vary from business to business. Here are some common objectives of business consolidation
- Increased revenue
- Cost synergies
- Innovation
- New products
- Operational efficiency
- Access to new markets
- Competition elimination
Pros of business consolidation
Business consolidation is beneficial in different ways. Here are some of them.
Increased market power
Business consolidation is effective in gaining more market power, which can help businesses in multiple ways. That said, a large business unit (after two businesses consolidate) is in a better position to negotiate prices with suppliers. Such businesses can greatly affect the product prices in the open market.
Diversification
Another good thing about business consolidations is that they allow businesses to expand their product line. When two businesses (especially those that offer complementary products) combine, their product line increases automatically. The new business unit can target two different sets of customers.
Expansion to new markets
Consolidation is also a great way to target new markets without toiling hard. For example, company A and company B are operating in different regions. After consolidation, both companies can sell their products in both regions without massive marketing efforts. They can use each other’s reputation to enter into new markets.
Economies of scale
Most importantly, consolidation helps businesses achieve economies of scale. An auto-mobile spare parts manufacturing company and an auto-mobile assembling company can achieve economies of scale through consolidation. It will result in lower costs and higher profits.
In fact, two companies selling the same product can also achieve economies of scale and save costs. For instance, the Exxon and Mobil merger is a great example of successful mergers and acquisitions to achieve cost synergies. The $75 billion dollar helped both companies become a single large unit, which ultimately resulted in $5 billion synergies.
Cons of business consolidation
Business consolidation has its drawbacks as well.
Job losses
Where consolidation is a great way to achieve economies of scale, it also results in job losses. The consolidation between Mobil and Exxon resulted in 16000 job losses. Job layoffs are obviously bad for employees and the economy as a whole.
Reduced competition
Although businesses intend to reduce market competition through consolidation, it can have negative effects as well. For instance, reduced competition is not good for customers as it creates a monopoly. Monopoly can lead to increased market prices, which may lower sales. It can also affect the product innovation process.
Integration challenges
The biggest challenge after mergers or acquisitions is to ensure smooth integration of both companies. That is because both companies may have different work cultures, systems, and operational methods. It is important for companies to have a clear integration plan to complete the process smoothly.
How to streamline mergers and acquisitions deals?
- Define clear goals and objectives/reasons behind the consolidation
- Streamline due diligence in mergers and acquisitions with the help of technology, such as virtual data rooms.
- Consider the cultural differences and find a way to integrate cultures from both sides.
- Develop transparent communication channels to win the trust of suppliers, employees, stakeholders, etc.
- Retain important human resources and communicate early.
Summing it up
Business consolidation helps with numerous goals, contributing to achieving economies of scale, increasing market share, expanding to new markets, and improving operational efficiency.
However, it may also result in job losses, reduced market competition, and monopoly. Also, the post-merger integration can be challenging too. That said, you should consider all the benefits and limitations of this initiative before participating in it.
