What Is Horizontal Integration?
Horizontal integration is a merger between two companies operating in the same industry. These companies are usually competitors and merge to gain higher market power and economies of scale. It is a business strategy in which entities try to grow and expand at the same industry level.
Other motives include a larger customer base, higher pricing power because of increased market share, and lower employment costs, as the top management of the merged entity, is lower than the two merging entities combined. But such a strategy may sometimes create a monopoly in case the new entity is successful in capturing a large part of the market.
Table of contents
- Horizontal integration refers to a merger between companies running in the same industry. Usually, These companies are competitors and amalgamate to earn higher market power and economies of scale.
- The other motives of horizontal integration are having a more extensive customer base, higher pricing power due to increased market share, and lower employment costs due to the top management of the merged entity, which is lower than the combined two merging entities.
- Vodafone-Idea, Marriott-Starwood, Arcelor-Mittal, Exon-Mobil, and JP Morgan Chase are examples of horizontal integration.
Horizontal Integration Explained
Horizontal integration facility is the strategy that many organizations follow in order to survive and expand at the same industry level.
Horizontal integrations are a common practice in corporate finance. All companies are trying to become market leaders, and sometimes when the interests of 2 companies align, and horizontal integration benefits help them achieve those interests. Together, the merged entity will have a total asset that is much more than their assets individually.
Such kind of integration may result in monopoly power among the integrated companies if they are able to grab a vast market share. To prevent this, rules and regulations should be in place.
However, the government keeps a check on mergers. It has the power to impose Antitrust laws, disallowing the merger if it perceives that it would lead to situations that are against the public interest. As a result, horizontal mergers are most common among companies in a mature cycle stage, increasing market share and efficiency.
Financial Modeling & Valuation Course (25+ Hours of Video Tutorials)
The various types of horizontal integration facility are mentioned below.
- Merger – In this process, two companies merge their business and combine them into one new entity. The management, operation process, and brand names are retained and shared in the new organization. It helps reduce competition and increase market presence.
- Acquisition – In this, one company takes over or acquires another and the buyer has control. The acquired entity’s resources are retained and used as needed.
- Internal expansion – In this, the entity expands internally through better utilization of resources by training staff, purchasing better machinery, and implementing a higher level of technology.
Let us try to understand the concept through some examples.
Century Industries is a furniture manufacturing company that is operating in the market. It supplies furniture for both office and household purposes. But, another furniture company Wood Color, which is only in the household market, has been gaining market share very rapidly due to their latest designs and efficient supply chain.
Century Industries has decided to integrate its business with Wood Color to eliminate competition, gain better market share, and take advantage of Wood Colour’s better product designs and supply chain management. Wood Color will also have the advantage of a huge customer base and access to the market for office furniture.
In the above example, horizontal integration benefits both entities.
Example #2 – Vodafone-Idea
Vodafone and Idea were two telecommunication giants in India. Both companies had a nominal market share with some pricing power over the customers. However, with Reliance Jio, all the telecom companies took a significant hit. Jio launched attractive offers for customers to avoid and gradually shifted from other companies to Jio. Let us look at a few numbers: –
The merged entity could service a larger customer base with relatively lower assets and combined resources. In addition, the cost savings from equipment, employees, operations, and other heads led to an estimated annual synergy of $2 billion for the merged entity.
Example #3 – Marriott-Starwood
Marriott and Starwood were two renowned hotel chains all across the globe. In 2016, Marriot acquired Starwood in a deal wherein the Starwood shareholders were given 0.8 shares of the merged entity against every Starwood share they held (0.8x acquisition ratio).
Post-merger, Marriott has access to over 6,000 properties in about 125 countries. The biggest challenge this deal faced was merging the loyalty programs of the two chains because of the different benefits each program provides. The mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. was officially complete, consolidating the various loyalty programs into one during the second half of 2018.
Example #4 – Arcelor-Mittal
Arcelor-Mittal is the world’s largest steel producer, formed after two steel giants, Arcelor SA, and Mittal Steel Company, merged. LN Mittal became the President of the new entity and owned the majority stake.
Mittal started the bid for a merger by offering cash to Arcelor shareholders. The board initially did not agree to the merger and started looking at Severstal for a possible merger. However, after detailed talks, Mittal improved its bid and, looking at the perceived synergies that the new entity would offer, paid €40.37 to Arcelor shareholders to buy them out. The resulting firm produced 10% of the world’s total steel post-merger.
Thus, in the above examples, we see the importance of horizontal integration.
- Companies with horizontal integration benefit from integration synergy through better prices, research, development, production, marketing, better technology, etc.
- Efficiency level increase leading to cost reduction.
- Production level increases, resulting in higher revenue and profits.
- It helps in market expansion and increases export opportunities.
- It reduces competition, which increases the importance of horizontal integration.
- Companies with horizontal integration have a chance of monopoly creation.
- Due to the increase in size, the new entity may be difficult to manage.
- The process may not give a positive change as expected.
Horizontal Integration Vs Vertical Integration
Horizontal integration is the strategy of combining entities at the same industry level to achieve growth, whereas vertical integration is growth by streamlining operations at various stages and combining them. However, the differences between them are as follows:
|Horizontal Integration||Vertical Integration|
|Firms at the same industry level combine.||Firms at different operation levels combine.|
|The main aim is to grow and increase market share.||The main aim is to develop a strong operation process and supply chain.|
|It reduces competition.||It reduces cost and increases efficiency.|
|Investment is more.||Investment is less.|
Frequently Asked Questions (FAQs)
Horizontal integration refers to a business that expands by purchasing a similar company in its industry at a supply chain similar point. At the same time, vertical integration refers to if a business grows by buying another company working before or after them in the supply chain.
Horizontal integration allows Rockefeller to get enormous control over the oil industry and utilize that control to create an impact on vendors and competitors.
Horizontal integration is a visionary strategic choice for companies. It can increase market share, efficiency, cost reduction, and economies of scale if determined and appropriately executed.
Horizontal integration happens when similar companies amalgamate in the supply chain similar stage. Compared to vertical integration, which helps a company move earlier or later in the supply chain, horizontal integration strengthens a company’s present position along a manufacturing process.
This article is a guide to what is Horizontal Integration. Here, we explain it with examples, vs vertical integration, its advantages, disadvantages & types. You can learn more about finance from the following articles: –