Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail


What it is:

In business, consolidation refers to the merger of several companies in a specific industry, which typically concentrates market share in the hands of a few large companies.

How it works (Example):

Perhaps one of the most obvious examples of industry consolidation can be seen in the evolution of public accounting over the twenty years. In 1986, nine large accounting firms dominated the industry. But in 1987, Klynveld Main Goerdeler (KMG) merged with Peat Marwick Mitchell to create KPMG Peat Marwick, reducing the number of top-tier players to the "Big Eight." Then in 1989, Ernst & Whinney merged with Arthur Young, and Deloitte Haskins & Sells merged with Touche Ross, further consolidating the industry to the "Big Six." In 1998, the merger of Price Waterhouse and Coopers & Lybrand created the "Big Five," and the dissolution of Arthur Andersen in 2002 left the "Big Four."
Another, more recent example can be found in the online brokerage business, where after several rounds of consolidation, three major competitors have emerged: E*Trade (following its acquisitions of BrownCo and HarrisDirect), Ameritrade (which recently won a bidding war for TD Waterhouse), and Charles Schwab.

Why it Matters:

One of the driving forces behind consolidation is the operating efficiencies that often arise from mergers. Because the merged entities can merge existing operating structures and reduce any overlap, there is usually an opportunity to realize significant cost savings, as well as related revenue synergies. There are numerous other reasons which might cause a company to acquire a rival, like gaining an expanded geographic reach, a larger customer base, a broader product line, etc.
Like oligopolies, duopolies, cartels, and other environments in which a few companies control all or a significant portion of an industry, consolidations alter the balance of power in an industry. Investors should carefully consider the ramifications that merger and acquisition (M&A) activity might have on the competitive landscape.

Related Terms View All
  • JAJO
    Assume you own 100 shares of Company XYZ. At the end of the quarter (say, March 30),...
  • Saitori
    Saitori are similar to specialists in the New York Stock Exchange. They match up brokers...
  • Street Expectation
    Market analysts consider economic conditions, consumer sentiment, research and...
  • Quiet Filing
    When a company is getting ready to go public, it files an SEC Form S-1, which is also...
  • Jobs and Growth Tax Relief Reconciliation Act of 2003
    Often abbreviated JGTRRA, the Job and Growth Tax Relief Reconciliation Act of 2003 was...