Horizontal integration definition
/What is Horizontal Integration?
Horizontal integration occurs when two businesses merge that produce goods or services at the same level in the value chain. The reason for doing so is to create economies of scale, as well as to cross-sell to each other’s customers. This can result in the creation of a monopoly or oligopoly. A horizontal integration is one of the most common types of merger, since it essentially means that competitors in the same market are combining their operations and assets.
Examples of Horizontal Integration
Here are several examples of horizontal integration:
Two manufacturers of electric engines merge. One entity produces engines for cars, while the other entity produces engines for trucks.
Two manufacturers of retail homes merge. One entity builds lower-income housing, while the other constructs high-end homes near golf courses.
Two consulting firms merge. One entity provides software development services in the defense industry, while the other entity provides the same service, but in the oil and gas industry.
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Advantages of Horizontal Integration
The horizontal integration strategy may be employed for several reasons, including the following:
To gain production efficiencies by producing more units at central manufacturing facilities.
To gain purchase volume discounts by buying raw materials in bulk.
To plug holes in the product line of the acquirer with products made by the acquiree. This is an especially fine advantage when there is evidence that customers are leaving because of specific holes in the product line.
To gain sufficient mass in the marketplace that the resulting combined company may make price increases stick.
To eliminate duplicative positions within the companies, thereby stripping out costs. For example, the combined entity could reduce its sales force by having fewer salespeople sell the entire product range of both organizations.
Disadvantages of Horizontal Integration
As is the case with any merger, there is a risk that a horizontal merger will not result in the expected cost savings and revenue enhancements. In many cases, a merger drives away key employees, resulting in an overall decline in the value of the combined businesses. This risk is enhanced when the firms have differing company cultures, so that the employees of the acquired entity become unhappy with the culture of the acquirer that is being imposed on them.
Anti-Trust Aspects of Horizontal Integration
If there are several horizontal integration mergers within the same industry that concentrate market share with a small number of companies, this is considered an oligopoly. If the resulting market share is largely held by one entity, this is considered a monopoly. In either case, the acquirer may be investigated under anti-trust laws, and a proposed acquisition may be rejected by the government.
The Difference Between Horizontal and Vertical Integration
A different type of merger is vertical integration, which is when companies merge that are in different positions in the value chain. For example, a car manufacturer could buy a producer of car tires, in order to secure this input to its production line. The key difference between the horizontal and vertical integration concepts is that horizontal integration occurs among similar businesses, while vertical integration occurs between suppliers and customers.