Definition of Industry Consolidation

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 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.

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.

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.

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.

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.