Horizontal Merger: Definition, Examples, How It Differs from a Vertical Merger

What Is a Horizontal Merger?

A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry. The aim is usually to create more efficient economies of scale, exploit cost-based and revenue-based synergies, increase market share, and generally gain an advantage over other competitors operating in the same space.

Horizontal mergers are just one type of merger. Another is the vertical merger, which takes place when firms from different parts of the supply chain consolidate to make the production process more efficient or cost-effective.

How Horizontal Mergers Work

When companies merge, the idea is that they are better off together than as separate entities. With horizontal mergers, two companies that usually compete against each other combine into one entity. That can potentially bring a number of competitive advantages, including:

• Increased market share: If one company sells products similar to the other, the combined sales of a horizontal merger will give the new company a greater share of the market.
• Enhanced offerings: If one company manufactures products complementary to the other, the newly merged company may offer a wider range of products to customers.
• Boosted reach: The business might be able to sell to different geographical territories if one of the pre-merger companies has distribution facilities or customers in areas not covered by the other company.
• Leveraged economies of scale: Money can be saved in numerous ways, such as buying more in bulk and improved negotiating power.

When everything goes to plan, horizontal mergers can enable the new entity to gain an edge over the competition and potentially wipe some of it out.

Horizontal Merger vs. Vertical Merger

The main objective of a vertical merger is to improve a company’s efficiency or reduce costs. A vertical merger occurs when two companies previously selling to or buying from each other combine under one ownership. The businesses are typically at different stages of production. For example, a manufacturer might merge with a distributor selling its products.

A vertical merger can help secure access to important supplies and reduce overall costs by eliminating the need for finding suppliers, negotiating deals, and paying full market prices. A vertical merger can improve efficiency by synchronizing production and supply between the two companies and assuring the availability of needed items. When companies combine in a vertical merger, competitors may face difficulty obtaining important supplies.

Example of Horizontal Merger and Vertical Merger

Horizontal Merger

One example of a horizontal merger is HP’s merger with Compaq. The rationale behind this deal was to bolster product lines and market share and have a greater chance of competing with the likes of Dell.

Another high-profile horizontal merger was Exon’s tie-up with Mobil. Together, they became an oil giant capable of cutting costs and squeezing the competition.

Vertical Merger

In January 2022, Microsoft announced the acquisition of Activision Blizzard. The acquisition enabled Microsoft, owner of the successful Xbox brand, to reap the benefits of providing exclusive content to video gamers.

Much like a manufacturer acquiring a supplier, Satya Nadella stated that Microsoft was investing in Activision Blizzard "to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive, and accessible to all."

Special Considerations

Regulatory Hurdles

Not all proposed mergers go through. Sometimes regulators will put the brakes on the deal and refuse to give it clearance because it is deemed to have a negative impact on consumers.

A key concern about horizontal mergers is that they reduce the number of choices available to consumers. Competition is generally seen as a good thing. It helps keep prices down and encourages companies to innovate and focus on quality.

Don't Believe the Hype

Mergers tend to get investors excited. If they go to plan, significant competitive advantages can be realized. That promise can lead investors to overlook the complications. The reality is that most mergers (70% to 90%, according to Harvard Business Review) fail to achieve their expected value.

The Bottom Line

Horizontal mergers involve the combination of companies operating in the same industry and at the same stage of the production or distribution process. These mergers aim to increase market share, eliminate competition, and achieve economies of scale. On the other hand, vertical mergers involve companies operating at different stages of the production or distribution chain. They integrate either with suppliers (backward integration) or customers (forward integration) to streamline operations, gain control over the value chain, and potentially achieve cost savings and synergies.