Horizontal acquisition definition

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What is a Horizontal Acquisition?

A horizontal acquisition arises when an acquirer buys another business that operates in the same market space. The result is a larger combined entity that can compete based on greater market share, and which can take advantage of volume discounts to reduce its costs. The nature of the underlying business operations tend to remain the same, though they may become somewhat more centralized. For example, a large travel agent that specializes in adventure travel buys its main competitor; doing so allows the buyer to greatly expand its mailing list, and also gives it the ability to buy less-expensive airline seats and hotel accommodations, due to its greater purchasing volume.

Disadvantages of Horizontal Acquisitions

There are a few disadvantages to conducting a horizontal acquisition, which are as follows:

  • Company incompatibility. The acquired entity may have an entirely different culture and organizational structure from that of the acquirer, and so will not respond well to any attempts to integrate the organizations. In the worst case, the employees of the acquiree all quit, leaving the acquirer with an inoperable shell.

  • Product line incompatibility. The product lines of the acquirer and acquiree may be quite different, making it quite difficult to seamlessly integrate them into a common set of product lines. This can also result in separate field service operations, since the field staff requires different training for each product line.

  • Poor return on investment. If the acquirer overpays for the acquisition, it may find that it achieves a poor return on investment. A better alternative might have been to use the funds internally, to pursue organic growth.

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Horizontal Acquisitions vs. Vertical Acquisitions

A different concept is the vertical acquisition, where a buyer acquires either a supplier or a customer, thereby giving it greater control of the overall value generation process. Buying a supplier is referred to as backward integration, while buying a supplier is known as forward integration. It is much less common for a business to engage in a vertical acquisition.