Definition of Industry Consolidation

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Industry consolidation is a situation in which separate companies become one. It is sometimes described as a merger, although technically these are two different situations. In a merger, a new business is formed when one company absorbs the other; in a consolidation, companies join forces on relatively equal terms to form one new company. However, the two terms are often used interchangeably.

Consolidation is when two companies come together.
Consolidation is when two companies come together.

Reasons for Consolidation

Consolidation is a major trend in many industries, and the main reason why companies consolidate is to improve investment returns through cost cutting and productivity gains. Sometimes, even companies that have nothing in common come together in order to diversify. All these consolidations can be voluntary, or hostile--when the management of one firm resists the advances of the other, but is eventually forced to accept a deal by its current owners. The Economist magazine writes that consolidation is an activity that happens in waves.

Companies join forces to cut costs.
Companies join forces to cut costs.

Benefits to the Consumer

As the U.S. Federal Trade Commission points out on its website, many mergers benefit competition and consumers by allowing firms to operate more efficiently. However, some mergers can lead to monopolistic positions, which can then lead to higher prices, decreased innovation or a drop in the quality or availability of goods or services.

Mergers can lead to monopolies.
Mergers can lead to monopolies.

Horizontal Integration

Consolidations and mergers can be horizontal or vertical. Horizontal integration occurs when two companies within the same industry become one, on roughly equal terms. This type of integration often raises antitrust concerns, as the combined firm will have a larger market share than either firm had before merging.

Consolidations can be vertical or horizontal.
Consolidations can be vertical or horizontal.

Vertical Integration

Vertical integration occurs when two companies are at a different stage in the production process; for example, a car maker merging with a car retailer or a parts supplier. It raises antitrust concerns only if one of the companies already enjoys some monopoly power, which the deal might allow it to extend into a new market. A third variation is called conglomeration--it is an organization of previously independent firms with different activities brought under the same management and control of a corporate holding company.

Consolidation comes in waves.
Consolidation comes in waves.

History

According to Encyclopedia.com, four main waves of business consolidation have occurred in U.S. history. The first wave came at the end of the 19th century, producing corporations such as U.S. Steel, American Tobacco and DuPont. This, and the second wave, which came in the 1920s, were horizontal consolidations aimed at controlling prices and ending competition. The third wave came in the 1960s, and it saw the emergence of conglomerates, while in the 1980s, the fourth consolidation wave was driven by the need to compete in foreign markets.

American Tobacco emerged as a giant in the first wave of consolidation.
American Tobacco emerged as a giant in the first wave of consolidation.

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