Business Consolidation

  

Like a Pac-Man video game, a business consolidation involves the merger or acquisition of two or more small companies into a larger one. It can also refer to merging divisions within the same company.

The benefits of having the, uh...urge to merge...are that you may not need as many employees in purchasing, human resources, accounting, or other administrative functions.

Another advantage is that the new company might be able to obtain less expensive loans, since it now has more assets to put up as collateral. They will also now have a larger customer base, better geographic coverage, and perhaps lower prices from suppliers. Or...the acquiring company could just liquidate the assets of the company they are buying in order to eliminate a competitor, such as the big oil companies buying up solar power companies.

During the 1980s, major acquisitions seemed to happen on an almost daily basis, when investment banking companies would use the cash from the company they were buying in order to make the purchase, known as a leveraged buyout.

Related or Semi-related Video

Finance: What's the difference between m...23 Views

00:00

Finance allah shmoop what's the difference between mergers and acquisitions

00:08

all right people listen up Merger that's what's about to

00:11

happen here it's a merger acquisition that's what's about to

00:16

happen here Corporate america is kind of same thing when

00:20

two companies merge while they generally you know attracted to

00:24

each other hopefully respect each other they share stock or

00:28

combined the stocks of each side and you know combine

00:32

efforts and then and then cuddle afterwards if they're successful

00:36

at the merger than the combination of two roughly equals

00:39

yields more than the one plus one combo that made

00:43

them so two companies get together on generally equal ish

00:46

footing In that case acquisitions are a combining more like

00:51

that eating thing on much different footing The large company

00:55

eats or buys the target either using its more highly

00:59

valued stock currency or it's taft to do so Well

01:02

why would a company acquire another Well the target might

01:05

have one hundred employees ninety of whom can be fired

01:08

with massive expense savings after the acquisition For the acquirer

01:12

such that economically the acquisition won't just makes a whole

01:15

lot of financial sense acquisitions happen for market power reasons

01:19

As well like imagine the negotiating leverage that amazon would

01:23

have if it bought the next five biggest online retailers

01:27

Or maybe it'll just kill them Probably not legal for

01:29

them to buy him anyway given the monopoly like dominance

01:32

of amazon these days But wow that would be a

01:34

powerful set of acquisitions And that would be a good

01:37

reason for ems on to acquire a whole bunch Things

01:39

and bezos would grow even more powerful maybe too powerful

Up Next

Finance: What Does an Investment Banker Do?
450 Views

What do investment bankers do? Investment bankers help corporations make smart financial decisions, in the simplest terms. They help them make inve...

Finance: What is The Difference Between a Horizontal and a Vertical Merger?
6 Views

What is the difference between a Horizontal and a Vertical Merger? Horizontal mergers happen when two companies within the same industry decide to...

Find other enlightening terms in Shmoop Finance Genius Bar(f)