What is a Horizontal Merger?

A horizontal merger is the combination of two firms in the same industry. Horizontal mergers are more common when the initial growth of an industry is beginning to slow down, since this is the point at which some entities are more likely to fail, and so will be snapped up by their competitors.

Advantages of a Horizontal Merger

A merger between the firms allows them to combine product lines and achieve a higher combined market share within the industry. This approach may lead to economies of scale, especially if the production processes of the organizations are combined. There may also be synergies from the elimination of overlapping facilities and staff. Further, the combined product lines may be more extensive than what one firm could achieve alone, allowing the combined company to sell into additional market niches.

Disadvantages of a Horizontal Merger

There are several disadvantages associated with a horizontal merger, which are as follows:

Regulatory scrutiny. Horizontal mergers often attract scrutiny from antitrust regulators. If the merger reduces competition significantly, it can lead to legal challenges or require costly concessions, such as divesting parts of the business.
Culture clashes. Combining two companies with different corporate cultures can lead to conflicts among employees, management, and stakeholders, reducing the efficiency of the merged entity.
Integration challenges. Integrating operations, systems, and teams can be complex, costly, and time-consuming. Poor integration can negate the expected benefits of the merger.
Employee morale issues. Mergers often lead to job redundancies, which can result in morale issues, resistance from employees, and negative publicity.
Strained finances. If one company takes on significant debt to finance the merger, it can strain the financial health of the merged entity and limit future investment opportunities.
Customer distrust. Existing customers of both companies may perceive reduced quality of products or services due to operational changes or reduced competition, potentially causing a loss of customer loyalty.
Competitive response. Competitors may attempt to lure away key customers, telling them that the combined entity will not be able to service them properly.
Possible brand damage. If customers or other stakeholders view the merger negatively, it can harm the company’s reputation, particularly if it is seen as an attempt to stifle competition or exploit customers.
Loss of agility. A larger, merged entity may become more bureaucratic and less responsive to market changes, making it harder to innovate or compete effectively with smaller, more nimble competitors.
Reduced outcomes. Companies may overestimate the potential benefits (e.g., cost savings, market dominance) and underestimate the challenges, leading to lower-than-expected returns on investment.