Definition
A horizontal merger refers to the consolidation of companies that operate in the same industry or produce similar products or services. It typically involves competitors merging to create a larger business, with the aim of increasing market share, reducing costs, or expanding reach. The merger could potentially result in reduced competition in the industry.
Key Takeaways
- A Horizontal Merger refers to the consolidation of firms in the same business or industry, which results in the reduction of competition and an increase in market share.
- It is often pursued to achieve benefits such as cost efficiencies, increased synergies, and improved market presence. These mergers can also result in greater bargaining power with suppliers and distributors.
- While Horizontal Mergers can bring significant benefits, they are often subject to regulatory scrutiny since they can potentially lead to monopolistic practices that can be harmful to consumers and the overall industry competition.
Importance
A horizontal merger is a significant concept in finance as it pertains to the consolidation of firms that operate in the same industry or produce similar goods or services. This is important because it can lead to various financial benefits and competitive advantages.
For instance, horizontal mergers can lead to economies of scale, where merged firms achieve lower costs per unit because of increased output. It can also result in increased market share, giving the newly merged company greater influence in its industry.
Furthermore, horizontal mergers can offer the opportunity for diversification, risk reduction, and potential growth. Therefore, understanding the implications of a horizontal merger is vital for financial decisions and strategic planning in any business environment.
Explanation
A horizontal merger is essentially a strategy used by businesses to achieve various corporate objectives. The primary purpose of a horizontal merger is to increase a company’s market share and competitiveness. When two companies operating in the same industry at the same stage of the supply chain merge, they can achieve wider market reach, fuel faster growth, acquire new capabilities or technologies, eliminate competition, and gain economies of scale.
For instance, a horizontal merger can help a company diversify its product offerings or gain access to new geographical markets where the other merging entity already has a foothold. Another significant use of horizontal merger is to achieve cost efficiency. When two companies offering similar products or services combine, there can be considerable savings in costs due to consolidation of operations, reducing redundancies, sharing resources and overhead expenses, and optimizing processes.
For example, the merged entity can negotiate better with suppliers due to larger purchase volumes, resulting in lower costs of raw materials. It might also consolidate its workforce, eliminating overlapping roles, thereby saving on personnel costs. Through an effective horizontal merger, a company can significantly strengthen its financial position and overall business health.
Examples of Horizontal Merger
Walt Disney Company and 21st Century Fox: In 2019, Walt Disney Company merged with 21st Century Fox in a $
4 billion deal. Both companies operate in media sector, making films and television series. The merger expanded Disney’s portfolio of recognizable brands, providing the company a stronger position in the global entertainment industry.
Exxon and Mobil: In 1999, two major oil corporations, Exxon and Mobil, merged to form ExxonMobil. Both companies were from the oil and gas industry and the combination made ExxonMobil one of the largest publicly traded oil and gas companies in the world.
Daimler-Benz and Chrysler: In 1998, German automobile manufacturer Daimler-Benz merged with American auto company Chrysler to form DaimlerChrysler. This was considered a horizontal merger because the two companies were in the same industry. However, the merger ended in 2007 when the companies separated due to cultural clashes and less-than-expected synergies.
FAQ: Horizontal Merger
What is a Horizontal Merger?
A horizontal mergeris a merger or business consolidation that occurs between firms that operate in the same industry. It is synonymous with a merger, consolidation, or acquisition of rivals or industry equal firms.
What is the purpose of a Horizontal Merger?
The primary purpose of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies’ business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
What is an example of a Horizontal Merger?
An example of a horizontal merger would include if a video game publisher purchases another video game publisher, an automobile manufacturer buys another, or a camera manufacturer buys a maker of lenses. This is because they are in the same business or industry and are merging to make their operations more efficient or larger.
What are the potential downsides of a Horizontal Merger?
Horizontal mergers can often lead to monopoly conditions. This happens when the merging firms achieve high market concentration leading to anti-competitive behaviour, which results in higher prices for consumers. Additionally, if the integration process goes wrong, it can lead to heavy losses.
What is the difference between Horizontal and Vertical Mergers?
In a horizontal merger, companies at the same stage in the same industry merge to reduce costs, expand product offerings or reduce competition. In a vertical merger, companies at different stages in the same industry merge to reduce costs and improve efficiency.
Related Entrepreneurship Terms
- Market Consolidation
- Antitrust Laws
- Acquisition
- Synergy
- Monopoly
Sources for More Information
- Investopedia: A trusted source for definitions and in-depth explanations of various financial terms and concepts including Horizontal Merger.
- Corporate Finance Institute: A reputable platform that provides educational content on a range of finance and business topics, including Mergers & Acquisitions (M&A).
- CNBC: A well-known news source that provides news, articles, and commentaries on various financial news and topics including Mergers & Acquisitions.
- Financial Times: A leading global business publication that covers world business, finance, economic news, and analyses, including in-depth articles on Mergers & Acquisitions.
