What is Consolidation in M&A?
A consolidation made up of two or more firms that decide to combine their operations and resources into one entity. Fintalent’s consolidation consultants describe it as one company taking on the assets and liabilities of another company. Consolidating companies can cut costs while also increasing efficiencies through increased coordination and alignment between business units.
Main reasons for consolidation after M&A
1). Reduce Overhead Costs
One reason that you might want to consider using consolidations in M&A is to reduce your overhead costs. When you merge two or more companies together, the number of employees and other resources that are required might go down. This means that your firm becomes more efficient thanks to fewer employees and thus less time spent performing everyday business operations (e.g., human resources, finance, etc.). This also means that there’s a higher level of management oversight and strategic planning because the entire company is now being managed by fewer people who are doing so on a full-time basis.
2). The Right Fit
Another reason to consider consolidations in M&A is to ensure that the companies you’re merging into are a good fit for you. Certain types of firms tend to be more compatible than others when it comes to merging them. For instance, the companies in industries that are highly competitive and that have a lot of brand recognition (e.g., hotels and airlines) tend to be strong fits for other businesses with similar characteristics. As a big driver behind thinning down your offering, consolidations can help you locate better partners because they can help you consolidate offerings between your firm and other businesses.
3). Strategic Planning
Another reason to consider consolidations in M&A is to increase your level of strategic planning. There are several benefits that come with consolidating companies, such as creating a more cohesive approach across your organization and making it easier for you to focus on long-term goals with the stakeholders who are involved in the decision-making process. In addition, consolidations help you keep track of resource allocation and ensure that resources are allocated based on strengths and weaknesses between the firms being consolidated.
4). Reducing Risk from Size
One thing that many businesses worry about when they’re dealing with new acquisitions is whether or not these new customers will fit into their existing business model. This can be a critical issue for firms because if the new customers aren’t a good fit, you’ll need to make changes to your business model with the proper organizational adjustments. In this way, consolidations help you reduce risk from size by testing out new business models that might work better for your firm.
5). Acquiring Skills for Future Growth
In some cases, companies don’t want to acquire customers or acquire resources because they feel that these are too big of an investment to make. However, consolidating companies can help you acquire necessary skills or capabilities as it relates to strategic planning and cost reduction. This can be seen as a win-win situation because you get the benefits of acquiring new employees and resources (i.e. future growth), but at the same time you can avoid some of the costs associated with making these acquisitions.
Consolidations allow you to:
- Increase Your Resources – This allows you to acquire new employees and resources, which are strategic components in planning your future growth. In addition, you can acquire customers or resources without worrying about the costs of establishing these new ventures because they’re already established in a similar geographic area (i.e., merging with another company). This can be done by merging similar companies or buying businesses that have experience operating in the same market and have many of the same customers and resources.
- Increasing Profitability – By consolidating similar companies (or firms) in the same area, you’ll be able to increase your overall profitability without increasing your costs. For example, let’s say you have two different companies in your market that have similar customer bases and a similar level of profitability. If these companies are merged into one firm, you can benefit from the experience of both operations and use this experience to provide a better product or service to consumers.
- Improving Growth Potential – In some cases, consolidating companies can help improve growth potential since it allows for greater business expansion (i.e., greater resources and reduced risks). This is a risk-reducing strategy because you’ll be able to test out new business models and strategies with minimal investment. For example, let’s say you have two different companies in your market that have similar customer bases and a similar profitability. If these companies are merged into one firm, you can benefit from the experience of both operations and use this experience to provide a better product or service to consumers.
- Reducing Costs – Some of the benefits associated with consolidating companies include cost savings, enhanced profits, and improved strategic planning (i.e., fewer risks). This is because it allows you to acquire resources that allow for reduced costs for future growth (e.g., purchasing company assets or integrating the companies through mergers). This can also be accomplished by buying companies that have experienced operations in the same areas and will allow you to reduce start up or operating costs.
- Increasing Profits – By combining similar firms, you’ll be able to benefit from the resources accumulated by their previous businesses and use this experience to improve future plans. This is because it allows you to expand into new markets without putting much of a financial strain on your costs. For example, let’s say you have two different companies in your market that have similar customer bases and a similar profitability. If these companies are merged into one firm, you can benefit from the experience of both operations and use this experience to provide a better product or service to consumers.
- Increasing Profitability – This strategy can be used to increase profitability through greater resource use and increased revenues. For example, if you merge two similar companies into one, you’ll be able to benefit from the resources accumulated by their previous businesses and use this experience to improve future plans. This is because it allows you to expand into new markets without putting much of a financial strain on your costs.
