Consolidation (or amalgamation) is the act of merging two or more organizations into one. In strategic management, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. Consolidation occurs when two companies combine to form a new enterprise altogether; neither of the previous companies survives independently. The logic driving consolidation is the creation of economies of scale, economies of scope, new locations, new technology, or some other form of increased competitive capacity.
Mergers and Acquisitions
Mergers and acquisitions (M&A) are aspects of corporate strategy, corporate finance, and management that deal with the buying, selling, dividing, and combining of different companies and similar entities. This activity can help an enterprise grow rapidly in its sector or location of origin or expand into a new field or new location. M&A is different from joint ventures and other forms of strategic alliance, as mergers or acquisitions aim to create a single organization.
The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared. Generally speaking, a merger is a combination of organizations in which each abandons its previous brand and business models, creating a new organization with the combined capacities of each one. In an acquisition, one organization buys out another, with the acquired company usually placing its processes under the brand name of the acquirer.
Mergers and acquisitions of U.S. Banks
This diagram of bank mergers in the United States shows how extensive the consolidation of various companies has been. What start as more than 50 distinct companies have eventually consolidated into fewer than 20.
Merger Dynamics
In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist independently; a new company, GlaxoSmithKline, was created.
The classic example of consolidation is the merger of Bell Atlantic with GTE, out of which resulted Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the combined company lost the considerable value of both Yellow Freight and Roadway Corp.
Rationale
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: economy of scale, economy of scope, increased revenue or market share, cross-selling, synergy, taxation, geographical or other diversification, resource transfer, vertical integration, and hiring.
However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity (King, D. R.; Dalton, D. R.; Daily, C. M.; Covin, J. G. 2004. "Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators." Strategic Management Journal 25 (2): 187–200. doi:10.1002/smj.371). Other motives for merger and acquisition that may not add shareholder value include diversification, manager overconfidence, empire-building, and management compensation.
Managerial Implications
Because of the costs involved, consolidation is a very high-level strategic decision. All stakeholders in both organizations should be consulted, and agreements will often take many months or years to conclude. Cultural conflicts between two different organizations are not uncommon, as the mission, vision, and values of the individuals and groups within them are likely to differ. Managing this type of change strategically is complex and rife with conflict. Mismanagement during these processes can minimize the potential synergistic gains and reduce the efficacy of the new strategic plan.