Horizontal MergerExplained with Advantages & Disadvantages

Lisa Borga

A horizontal merger is a merger between companies that sell the same goods or services.

Because these mergers occur between competitors in the same industry, these mergers can offer considerable gains in market share as well as bring greater economies of scale.

These types of mergers commonly occur due to larger competitors in an industry purchasing smaller companies to benefit from greater economies of scale.

When horizontal mergers occur, the purchasing company is known as the acquirer, and the purchased company is referred to as the target.

Understanding Horizontal Mergers

horizontal merger

A horizontal merger is a merger between companies in the same industry, which often means that the companies will be direct competitors, though this will not always be the case if the companies operate in distinct geographical areas.

The most common reasons for horizontal mergers to occur are to benefit from reduced costs, competition, economies of scale, diverse product offerings, and access to new markets.

By merging two similar companies, the goal is generally to create value through economies of scale and cost reductions from synergies in the two companies’ processes.

Once the two companies combine into one larger entity, they can eliminate redundant positions, benefit from access to both companies’ suppliers, and gain much greater bargaining power when sourcing raw materials.

The company may also gain much greater control over the pricing of the goods or services it provides, but these actions are also much more likely to gain the attention of regulators concerned with anti-trust issues.

Another important purpose of a horizontal merger is for the acquirer to benefit from diversifying its product offerings by incorporating the target companies.

Often this occurs when a larger company in an industry attempts to merge with smaller companies in the same industry that offer a variant of the acquirer’s own products.

This can help the acquirer to remain relevant in the industry.

Another common reason to perform a horizontal merger is to gain entrance to a new geographical area.

By performing a horizontal merger with a company that offers similar products in another marketplace, the acquiring company can enter the market and benefit from the target company’s established resources, suppliers, and customer base.

This can greatly assist the acquirer in successfully introducing itself into the new market.

Horizontal Vs. Vertical Merger

There are many distinct types of mergers, and many involve one company purchasing another, but the two most common examples are horizontal and vertical mergers. In both of these types of mergers, there is a target company that will generally take the name and business practices of the acquirer.

Additionally, in both types of mergers, there is an existing relationship between the two companies, and the merger may result in anti-trust concerns from regulators.

However, there are many distinctions between the two types of mergers as well.

Unlike a horizontal merger which occurs within the same point in the supply chain, a vertical merger occurs between companies at different stages in the supply chain.

These mergers are typically made to benefit the efficiency of the acquiring company.

Specifically, a vertical merger may enable the acquiring company to ensure its access to supplies needed in producing its own good or services and reduce its costs in acquiring them by removing the need to find suppliers and negotiate deals at market prices.

The combined companies can then improve efficiency for the acquiring company by ensuring that supplies are available on time whenever they are needed without delays that may otherwise be faced due to conflicting schedules.

These types of mergers can also benefit the acquirer by potentially denying competitors access to the supplier and preventing competitors from doing the same.

Competitors may be forced to locate a different and less convenient supplier reducing their profits, which can raise the barriers to entry for new competition and potentially drive existing competitors out of the market.

As a result, a vertical merger, like a horizontal merger, can raise anti-trust concerns.

Advantages & Disadvantages of Horizontal Mergers

horizontal merger

Advantages of Horizontal Mergers

  • Reduced Costs: A horizontal merger can help a company to reduce costs and increase its profits. It can do this through both combining redundant positions, providing leverage in negotiations with suppliers, and through achieving economies of scale in which increased production of the same product reduces the average cost of production.
  • Access to New Markets: Horizontal mergers can give companies access to new markets in which the target company already operates. This can greatly assist in creating a successful introduction into new marketplaces by providing the acquirer with access to local suppliers, infrastructure, and an existing customer base.
  • Increased Product Diversity: A horizontal merger can help a company to diversify its product by introducing new variants on the products within its industry.
  • New Talent: Horizontal mergers can introduce new talent associated with the target company into the acquiring company helping it to grow.
  • Faster Growth: The inorganic growth offered by integrating a new firm through a horizontal merger can be much faster than investing in organic growth.
  • Reduced Competition: Horizontal mergers can help the acquiring company to gain market share and reduce intense rivalries within an industry.

Disadvantages of Horizontal Mergers

  • Difficulty Integrating: There is no guarantee a merger will result in a smooth integration between two companies. Companies may have distinct corporate cultures that may clash during a merger, and often the management of the target and acquiring companies may not have an easy time building working relationships. This may be particularly true if the merger is the result of a hostile takeover.
  • Failure to Achieve Synergies: Though a horizontal merger often allows two companies to achieve synergies in processes and eliminate redundant costs and positions, this does not always occur. This may instead lead to additional costs due to size and, in turn, reduced profits.
  • Anti-trust Concerns: In many cases, a horizontal merger can result in intense scrutiny from regulators concerned that such a merger may result in monopolistic control over an industry. In some cases, this may result in regulators requiring the merging companies to divest certain assets in order to complete the merger, or the merger may be prohibited entirely.

Final Thoughts

Though it requires considerable planning to ensure that no anti-trust concerns are present and that the two companies have complementary synergies, a horizontal merger can offer significant benefits.

By merging two companies that are excelling in their own industries, offer unique products, or can expand the geographical range in which a company’s products are offered, a company can often benefit significantly from investing in expanding its own range of products or attempting to begin entering into a new market on its own.

Key Takeaways

  • A horizontal merger is a merger between companies that operate in the same industry.
  • Horizontal and vertical mergers are the two most common types of mergers, and unlike a horizontal merger which occurs between competitors, a vertical merger occurs between companies at different stages of the supply chain.
  • A horizontal merger can offer considerable benefits to both market share and revenue as it eliminates competition and consolidates the products and services of both companies.

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  1. Northwestern University "Module 5: Welfare Analysis of Horizontal Mergers" Page 1 - 10. August 11, 2022

  2. University of Pennsylvania "Horizontal Mer ontal Mergers, Mark gers, Market Structur et Structure, and Bur e, and Burdens of Pr dens of Proof " White paper. August 11, 2022