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What is a horizontal merger in simple terms?
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In this article, I will break down the meaning of Horizontal Merger in business so you know all there is to know about it!
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What Is A Horizontal Merger
A horizontal merger in business refers to situations when companies selling the same products and services and operating in the same industry merge with one another.
In other words, when a company acquires another company offering similar products and services, we’ll refer to that merger as a horizontal merger.
When companies merge horizontally, the authorities will more closely assess the merger’s impact on fair competition to ensure that the merging companies do not overly dominate a particular market.
Horizontal mergers are advantageous for companies as the companies operate in the same space, have similar processes, target similar markets, and can generate greater synergies through the merger.
A horizontal merger can be compared to a vertical merger referring to instances when companies merge with other companies in their supply chain.
A vertical merger tends to focus on creating more efficient production processes at lower costs whereas horizontal mergers focus on consolidating market share.
Horizontal Merger Definition
A horizontal merger is a type of merger where the acquiring company purchases another company selling the same products and services.
Since the companies merging horizontally operate in the same industry and have similar products and services, their merger tends to create a much more powerful company.
The companies combined will exert greater control over the market and have a greater influence on overall competition levels.
For this reason, when large companies merge horizontally, antitrust concerns are typically raised.
Why Horizontal Mergers
There are many benefits to merging horizontally with another entity.
The fundamental reason why two companies merge is that they are convinced that the combined entity can produce greater value for their shareholders.
Here are some of the reasons why companies undergo horizontal mergers:
- To increase their market share
- To expand their product and service offerings
- To expand to other territories
- To grow more quickly
- To take advantage of economies of scale
- To take advantage of economies of scope
- To access their trade secrets and know-how
- To reduce competition in the industry
Horizontal Merger Challenges
Horizontal mergers tend to benefit the merging companies as they can take advantage of economies of scale and scope, share resources, and better dominate their industry.
However, not all horizontal mergers will produce the desired results.
Here are some challenges that merging companies can face when merging horizontally:
- They are unable to integrate their businesses
- The company cultures clash
- They overestimated the possible synergistic opportunities
- The market conditions change
- They end up cannibalizing their products and services
- They face lawsuits and legal challenges for reducing competition
Companies should carefully assess the benefits and drawbacks of attempting to merge with a peer in the same industry.
Horizontal Merger vs Vertical Merger
A horizontal merger is when two companies operating in the same industry and selling the same products and services merge with one another.
When there’s a horizontal merger, the combined entities can better dominate a geographical sector, increase revenues by offering more products and services, and take advantage of synergies between their combined business intelligence and know-how.
Horizontal mergers tend to produce more powerful companies having greater resources and market share than their closest competitors.
A vertical merger is a type of merger that takes place between companies operating in the same supply chain.
Vertical mergers are typically between companies that sell raw materials, components, or other goods and services to one another.
For example, a coffee retailer may acquire a coffee producer to have access to its own coffee.
Horizontal Merger Example
Let’s look at a couple of examples of horizontal mergers to better understand the concept.
Company ABC is the manufacturer of certain types of automobiles having 20% market share.
Company XYZ is another car manufacturer having a 25% market share.
If Company ABC and Company XYZ merge, it will be a horizontal merger as they both operate in the same industry and sell automobiles.
However, the combined entity will now have a 45% market share.
This merger effectively results in the merged entity dominating the market.
Company ABC is the largest software developer in North America.
Company XYZ is the largest software developer in Europe.
If Company ABC and Company XYZ merge, they will become a giant software developer dominating both the North American and European markets.
The combined entity will effectively dominate the industry due to its massive global footprint.
A real-life example of a horizontal merger is that between Hewlett-Packard (HP) and Compaq in 2011.
This was a $25 million merger where the two companies merged to better compete against IBM and Dell, cut costs, share resources, and better respond to customer needs.
The two companies combined were able to become technology leaders able to provide technology products and services to global customers.
So there you have it folks!
What is a horizontal merger?
In a nutshell, a horizontal merger is when a business acquires another business operating in the same industry.
Horizontal mergers tend to involve competitors or companies that are similar serving the same or similar markets.
The main reason why companies in the same industry merge is to become more powerful, dominate the industry more, and share their resources to grow faster.
Horizontal mergers tend to result in greater scrutiny by the government and the authorities to ensure that it does not affect competition and hurt consumers in the long run.
Now that you know what a horizontal merger means and how it works, good luck with your research!
I hope you enjoyed this article on Horizontal Merger meaning! Be sure to check out more articles on my blog. Enjoy!
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