Business consolidation occurs when a company combines its resources with another for a variety of reasons, such as excessive debt, lack of capital or poor management. It’s a blanket term that often reflects mergers and acquisitions. Here are key components and further explanations of consolidation.

 

Why Business Consolidation Happens

One of the main goals of business consolidation is to improve operational efficiency. It may occur when a startup runs out of capital to pay for new equipment or its staff. But it can also be the result of proven performance and profits to the point of attracting a bigger company to acquire it, the way Disney bought out Pixar. Many large companies like Microsoft are built on acquiring smaller successful business units that enhance the parent company’s brand.

Larger well funded companies are usually in the best position to buy out smaller firms. At the same time, when interest rates are low, smaller companies can take out large loans to buy other companies as an attempt to compete with bigger market players. In the case of the financial crash of 2008, several large financial institutions collapsed and were quickly bought out at low stock prices by some of the largest banks.

In the corporate world a market shakeout may occur when several companies merge to reduce competition, which has happened in the airline and radio industries this century. In the case of radio, consolidation followed the Telecom Act of 1996 that deregulated the industry, removing ownership limits.

 

How Supply and Demand Triggers Consolidation

The concept of consolidation is associated with multiple economic variables, including supply and demand. When supplies for an industry become scarce, abundant or too expensive, one of the solutions to stimulate economic activity is for companies to merge. Oversupply of materials or products can lead to market saturation that drives down prices, which can diminish net profits, leading to buyouts.

 

Pros and Cons of Consolidation

Sometimes consolidation is favorable to both firms, while other times one benefits at the expense of the other. Companies with plenty of valuable assets that can no longer pay bills may fall into bankruptcy, in which larger entities bid on the assets at bargain prices.

 

Consolidation can lead to either strengthening or weakening an organization. When a large firm acquires a smaller company, it’s common for the larger enterprise to take control of management decisions for the entire operation. In other situations, particularly when the smaller firm has proven success, it’s allowed to maintain its autonomy while benefiting from greater funding.