Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously. Such strategies generally do not arise from the bottom-up, but rather, must be formulated by corporate management. The companies involved in vertical integration each have their own unique role at different stages of the production process. The result is the creation of economies of scale, where the post-merger company obtains cost savings from the expanded scale.
Companies can also embark on horizontal integration by making more conscious allocations of internal capital. Through internal expansion, a company simply chooses to strategically change course and apply more resources in a different way. For example, a restaurant can expand to offer catering companies, or a beverage manufacturer may branch off to make food products. Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competition—either from potential new entrants, established rivals, or firms offering substitute or alternative goods. While a horizontal merger occurs when two companies in the same industry come together, a vertical merger occurs when companies that provide different supply chain functions/products/services combine. Horizontal spreads are a type of options strategy that involves buying and selling options with the same underlying asset and expiration date, but different strike prices.
Horizontal Merger Process:
- Horizontal integration can be a powerful tool for companies looking to expand their market reach and increase their market share.
- The company is expanding from its current position in the manufacturing process and performing a backward vertical integration.
- Another important factor to consider is the Herfindahl-Hirschman Index (HHI), which is a measure of market concentration.
- The company is still involved in the same supply chain stage but is becoming more powerful.
- From expanding market share and achieving cost savings to fostering innovation and diversification, this strategy presents a multitude of advantages.
- However, it is important to consider the potential antitrust implications and carefully evaluate the benefits and risks of consolidation.
This risk is particularly acute when the companies involved in the merger are large and have a substantial market share. The increased market power can also attract the attention of regulators, who may block the merger or impose conditions on it. In the dynamic world of business, companies are constantly seeking ways to expand their horizons and gain a competitive edge. This approach involves the acquisition or merger of companies operating in the same industry or producing similar products. By combining forces, businesses can achieve economies of scale, increase market share, and enhance their overall competitiveness. These case studies illustrate the success of horizontal acquisitions in various industries.
Horizontal Integration is a process in which a company increases its production of goods and services to strengthen its position in the market place. It is done by expanding through acquisitions or mergers in the same level of the supply chain. It can lead to economies of scale, improved market share, access to new customer segments, and increased power over the supply chain. Additionally, it can also reduce competition in the market, leading to more opportunities for growth and profitability. Horizontal integration is a type of M&A transaction that occurs when similar companies operating in the same industry at the same stage in the supply chain merge.
Case Studies of Successful Horizontal Integration and HHI ImplementationOriginal Blog
An acquisition occurs when a company buys another firm and folds its operations into its own. From the 1970s onwards, Santander’s acquisition of multiple regional and national banks helped the company become a global retail banking giant. By combining resources, Marriott improved its quality control and operational efficiencies, leading to more control over the value chain and enhanced customer satisfaction. Take your time to learn about all the technical and cultural details of your future merger and prepare well to make the process smooth and seamless.
Definition and Examples of Horizontal IntegrationOriginal Blog
On the other hand, horizontal integration strives to eliminate competitors, grow in market size, and create economies of scale. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly. If a merger threatens competitors or seems to drastically restrict the market and reduce consumer choices, it could attract the attention of the Federal Trade Commission. As the difference between vertical and horizontal is clear, the vertical integration approach seems to be easier and seamless and with fewer risks.
As stated above, M&A teams will seek this kind of deal if there are economies of scale, as the increased production must lead to significant cost advantages across the value chain. In 2004, the United States Department of Justice ordered the company to pay $10 million after it pleaded guilty to illegally fixing diamond prices. As of 2022, this clash reduced their market share from approximately 29% to what was 85% in the 1980s. Businesses looking to achieve scale often begin by developing horizontal integration strategies identifying potential target companies that would enable it to grow. They may also consider geographic expansion by considering similar entities outside the area of their current location. Bank of America was born in this wave of mergers and acquisitions when Nations Bank horizontally merged with Bank of America in 1998 in a $62 billion deal.
Is Samsung vertically integrated?
Samsung follows a strategy of vertical integration and diversification to maintain control over its supply chain and expand its presence in various markets. The company designs and manufactures key components in-house, including processors, memory chips, displays, and batteries.
Vertical vs. Horizontal Integration: Key Differences
- Horizontal integration can provide several benefits to companies, but it also comes with its own set of risks and challenges.
- Oftentimes, the goals behind this type of vertical merger are to capture synergies and improve productivity by creating a business with a more efficient supply chain.
- The lower the HHI value, the more competitive the market, while an HHI value above 2,500 usually indicates a highly concentrated market.
- Vertical integration suits companies seeking more control over their production processes and costs.
- To strengthen their market presence and competitive positions, companies will execute one of three horizontal integration transactions–mergers, acquisitions, or internal expansion.
- By acquiring or merging with other companies, businesses can gain access to new technologies, intellectual property, and other valuable assets.
However, horizontal integration brings more benefits and capabilities while being hard in terms of integration and the long process of cultures merging. In reality, these are just two different approaches that fit different types of businesses. Choosing between these two options highly depends on your current financial capabilities, target goal, niche, and other details. Further, we will explain the factors to consider when you decide on which strategy to choose.
However, when horizontal mergers succeed, it is often at the expense of consumers, especially if the merger reduces competition. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws. Horizontal integration offers several serious advantages; however, this is a challenging process with possible drawbacks that companies should consider. Exxon bought Mobil for about $77 billion in stock, and the purchase enabled Exxon to gain access to Mobile’s gas stations as well as its product reserves. Thanks to the pooling of resources, increased efficiency in operations, and streamlining of procedures, ExxonMobil became one of the biggest oil companies in the world.
In the healthcare industry, CVS Health’s acquisition of Aetna is another example of horizontal integration. The merger allowed CVS to create a more integrated healthcare experience for its customers by combining pharmacy services, insurance coverage, and clinical services. This integration has the potential to create cost savings for both companies and improve the overall quality of care for patients.
Is Ikea vertical or horizontal integration?
Through a massive vertical integration strategy, IKEA became one the largest consumers of wood in the world. They built plants capable of pulverising wood into dust and manufacturing many multipurpose boards at once.
Industry Analysis – How to succeed in Hollywood
This collaborative approach to innovation can lead to breakthroughs and position companies as industry leaders. In conclusion, while horizontal integration offers potential rewards such as increased market power and examples of horizontal integration economies of scale, it also comes with its fair share of risks and challenges. Companies must carefully assess these risks, conduct thorough due diligence, and plan for effective integration to maximize the chances of a successful outcome. By being aware of the potential pitfalls and learning from past case studies, companies can navigate the complexities of horizontal integration and position themselves for long-term success in dominant markets. A key advantage of horizontal integration is the ability to achieve economies of scale. By consolidating production and distribution processes across multiple firms, a larger company can reap the benefits of increased efficiency, lower costs, and higher output.
What is a real life example of a horizontal merger?
While it has been complicated, Volkswagen's purchase of Porsche is considered a horizontal merger as the two both occupy the automobile space. Cutting costs and sharing engineering are two benefits of this deal.