Complete consolidation | Definition | Advantages & Disadvantages
Complete consolidation emerged because of the need for greater control and unification of business interests. It represents complete fusion of two or more combining units.
Table of Contents
Definition of Complete consolidation
Haney defines complete consolidation as, “a form of business organization which is established by the outright purchase of the properties of constituent organizations and the merging or amalgamating of such properties into a single business unit”.
Advantages or merits of Complete Consolidation
The following are the advantages of Complete Consolidation
1. Economies of Scale: Combination of two or more organizations results in a single large organization. The large organization enjoys economies of scale in buying (quantity discounts because of bulk purchases), marketing (advertisement time in media is bought in bulk and therefore costs less) etc.
2. Unity of interest: There is unity of interest and less scope for manipulation of affairs of constituent companies.
3. Stability: When compared to other forms of combinations, complete consolidation has more stability and enjoys longer life.
4. Simple structure: The organization structure is simple. Therefore it is easy to manage and control.
5. Economy of management: Since there is one single entity, the expense of managing is less when compared to a holding company structure where a number of officials have to be employed.
6. Reduction in competition: When competing businesses combine together, then competition is reduced. The amount spent on advertisement and sales promotions can be reduced.
7. Better management: Since employees of different businesses are combined into one, there is greater depth of managerial talent available. Better team work, balanced decisions and overall improvement in performance can be achieved.
8. Increased financial strength: As the financial resources of the combined units are merged together, the combined unit has increased financial resources. The size of the Balance Sheet increases and the ability of the company to raise funds improves.
9. Expansion and diversification: Increased financial strength and economies of scale achieved by a combined unit enable it to expand the business. The combined unit can plan for expansion and diversification to ensure continuous growth.
Disadvantages or demerits of Complete consolidation
The following are the disadvantages of complete consolidation.
1. Difficult to form: Consent of a large majority of shareholders of the constituent companies has to be obtained for forming a complete consolidation.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.
3. Loss of Goodwill: In the case of merger, the absorbed entity loses its separate entity and in amalgamation all the combining business loses their entity. The goodwill that these companies would have created is lost when they lose their separate existence.
4. Problem of over capitalization: When business units combine it might result in over capitalization. Shareholders would not get an adequate return on their capital.
5. Inefficiency: Consolidation may result in very large units. If proper management processes and systems are not in existence, it may lead to inefficiency and losses.
6. Lack of flexibility: Large units do not have flexibility. A large organization has very less dynamism and ability to adapt to changing business environment.
