Question

When are consolidation targets inappropriate as they give those involved in business nothing to aim for? Discuss in 80 to 100 words.

Answer 1

Answer:

Business consolidation is the combination of several business units or several different companies into a larger organization. Business consolidation is used to improve operational efficiency by reducing redundant personnel and processes.

A business consolidation is most often associated with mergers and acquisition in which several similar, smaller businesses are combined into a new legal entity and the original entities cease to exist. Business consolidation can result in long-term cost savings and a concentration of market share, but in the short-term can be expensive and complex.

Business consolidation fit into a few categories, include:

• Statutory consolidation: When businesses are combined into a new entity and the original companies cease to exist.
• Statutory merger: When an acquiring company liquidates the assets of a company it buys, incorporating or dismantling its operations.
• Stock acquisition: A combination that sees an acquiring company and both companies survive.
• Variable interest entity: When an acquiring entity owns a controlling interest in a company that is not based on majority of voting rights.

Business Consolidation Advantages:

Consolidated business can obtain cheaper financing if the consolidated entity is more stable, more profitable, or has more assets to use as collateral. It may also be able to use its larger size to extract better terms from suppliers because it will be able to buy more units.

In addition, business consolidations can result in a concentration of market share, a more expansive product lineup, a greater geographical reach and therefore a bigger customer base.

Business consolidation Challenges:

Companies that combine operations must deal with cultural differences between firms. For example, merging and older, established technology company with a small start-up company may achieve a beneficial transfer of knowledge, experience and skills, but also may cause personnel to clash.

In such an example, management in the older firm may feel more comfortable with operating under strict administrative, while the start-up company may have preferred less administrative authority over operations.

Whether the consolidation is a merger, acquisition or other combination, both buyers and sellers face tax consideration that require planning.

At last i can say that business consolidation use various methods to value their targets. Some of these methods are based on comparative ratio such as the P/E and P/S ratio or replacement cost or discounted cash flow analysis.