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Horizontal integration can be very beneficial for two companies. When done correctly, it can be very advantageous. Among the benefits are an increase in market share, reduced competition, and increases in other synergies. But as with anything else, there are also downsides, such as antitrust issues and legalities, a reduction in flexibility, and destroying value rather than creating it.
Key Takeaways
- Horizontal integration occurs when two companies that are in the same industry and at the same stage in the production process merge into a single entity.
- Undergoing horizontal integration can benefit companies and typically takes place when they are competing in the same industry.
- Advantages of horizontal integration include increasing market share, reducing competition, and creating economies of scale.
- Disadvantages include regulatory scrutiny, less flexibility, and the potential to destroy value rather than create it.
What Is Horizontal Integration?
Horizontal integration is a business strategy where one company acquires another business that’s in the same production process in the same industry. This means both companies make the same goods and services and are at the same level of the value chain. This allows the acquiring company to expand its operations by remaining at the same level in the sector.
Companies often choose this type of integration when they want to:
- Increase their market share and/or customer base
- Expand into a new market
- Create new economies of scale
- Gain access to a new product or service
- Eliminate the competition
Horizontal integration is the opposite of vertical integration. It happens when one company acquires another within the same industry where the target is at a different part of the supply chain. Vertical integration allows businesses to expand their operations and retain better control of the value chain. This allows them to eliminate the need for suppliers and become more independent.
Benefits and Drawbacks of Horizontal Integration
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Regulatory scrutiny
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Stunting economic growth
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Reducing flexibility
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Destroying value
Benefits of Horizontal Integration Explained
There are numerous benefits to undergoing horizontal integration. We’ve listed some of the most common ones below.
Larger Market Share
The most obvious benefit is an increased market share or market power. When the two companies merge, they also combine the product base, technology, and services that are available on the market. With more products under one name, the new company can increase its foothold in the market and among consumers.
Bigger Base of Customers
Because the two companies may operate in the same industry, they may not necessarily have the same consumer base. By merging the two companies into one, the new organization now has access to a larger base of customers.
Increased Revenue
By increasing its customer base, the new company can now boost its revenue. It’s typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.
Additional Benefits
Here are a few other advantages of horizontal integration:
Horizontal integration should not be confused with lateral integration, which is the merger of two companies that sell related goods but do not compete with each other.
Drawbacks of Horizontal Integration Explained
As with any process, some disadvantages must be considered along with the benefits. Some of the biggest disadvantages associated with this type of strategy are highlighted below.
Regulatory Scrutiny
The first and most troublesome is the level of scrutiny this kind of strategy faces, especially from government agencies. Big mergers like these are the reason why antitrust laws are in place. These laws prevent big corporations from mergers and acquisitions (M&A) that would narrow the competitive market and possibly create a monopoly.
This is seen as being a predatory act, giving one player dominance in the market. It creates the idea that the larger, newly formed corporation may take advantage of consumers with higher prices and narrow product/service choices.
Additional Cons
Other cons of horizontal integration include:
- Stunting the economic growth of the new enterprise.
- A reduction in flexibility, which happens because the company is now a larger organization. The addition of more personnel and processes means the need for more transparency and, therefore, more accountability and red tape.
- Destroying value rather than creating it. This happens because the synergies never materialize despite the costs of the horizontal integration.
Examples of Horizontal Integration
Horizontal integration takes place when two companies that compete in the same industry at the same stage of production merge. One such example is Disney’s acquisition of Pixar in 2006. Disney (DIS) faced stagnation in the market and was rejuvenated after the purchase of Pixar. The two companies operated in the same space (animation) and were able to merge their technology, thereby increasing market share and profitability.
The merger of Exxon and Mobil to form ExxonMobil (XOM) is another great example of horizontal integration. As individual entities, the two were similar in size and operation and joined together to form a stronger company in 1999.
Why Is Horizontal Integration Important?
Horizontal integration occurs when two companies in the same industry at the same stage in the production process merge into a single entity. It allows companies to gain market share and market power, eliminate their competition, acquire new products and services, a larger customer base, and increase their revenue. It also gives them the opportunity to create new economies of scale and economies of scope.
What’s the Difference Between Horizontal and Vertical Integration?
Horizontal and vertical integration are two strategies that businesses use in their merger and acquisition activities. Horizontal integration occurs when two businesses within the same industry and at the same point in the production stage combine to form a single business. Vertical integration, on the other hand, takes place between two companies in the same industry but at different points in production.
Why Is Horizontal Integration Heavily Scrutinized?
The government and financial regulators of certain countries frown upon horizontal integration for several reasons. Horizontal integration is often used to eliminate competitors from the market. This means fewer competitors and may even lead to a monopoly. This puts production and pricing power in the hands of a few—or even one—players, which can be harmful to consumers. Government agencies often put antitrust laws in place to prevent this from happening.
The Bottom Line
Horizontal integration can be a smart strategic choice for companies. If analyzed and executed properly, it can lead to increased market share, increased efficiency, reduction in costs, and economies of scale.
When undergoing a horizontal integration, however, it is important to look out for the disadvantages, such as increased regulatory scrutiny, failure to combine synergies, and destroying value, which would make the entire process worthless and costly.