Examples on Horizontal Merger
In this article, we discuss examples of the horizontal merger to get a conceptual understanding of such mergers. In simple terms, Horizontal Merger refers to the amalgamation of two companies in the same industry. It happens when companies operating in similar products or business lines come together to form a merged entity. Horizontal Merger gives the merged entity the strength to beat the rivals in the market by consolidating the financials of 2 similar companies into one merged entity.
Top 3 Real-Life Examples of Horizontal Mergers
Horizontal Merger occurs when a big company wants to acquire a small company in the same business line in order to gain majority market shares by consolidating its position and creating a monopoly of its products. It offers great synergies to the merged company in terms of a diversified product line, increases market share, well-established infrastructure, etc. Below are real-life examples of a horizontal merger.
Horizontal Merger Example #1
Suppose ABC Limited sells steel products and PQR Ltd also sells steel but at the retail level to individuals.
In this example, there can be a horizontal merger between these two companies in order to create synergy and increase the revenues and market shares of the group.
In the above example, by combining the two companies, the asset base of the combined entity has increased from $1,00,000 to $2,00,000.
Further, there is goodwill generated in the horizontal merger process which has been recognized in the balance sheet as per the accounting norms.
Horizontal Merger Example #2
Suppose ABC Ltd is into manufacturing of plastic bags and PQR Limited is into the business of manufacturing of plastic packet. there can be a horizontal merger between these two companies can gain synergy in the following way :
In this ABC Ltd and PQR Ltd are in the same line of business manufacturing plastic products.
- By combining the two companies, the merged company will have a diversified steel product base which they can sell to the consumers.
- You will see that the combined entity turnover has increased from $1,50,000 to$3,50,000 ~130% jump in the turnover.
- By executing a horizontal merger, the net profit of the company has risen from $50,000 to $1,50,000 a 3 times growth in the net profit thereby increasing the per-share valuation.
Horizontal Merger also will help the merged entity to control its expense ratio since the combined expenses of both the companies along with the combined revenues will surely lower down the expense ratio and improve the financial performance of the company.
Horizontal Merger Example #3
Suppose ABC Ltd is in the business of manufacturing of helmets but has no infrastructure and is heavily making loses but has a very high distribution network. On the other hand, there is PQR Ltd who has an established infra set-up and is heavily making profits.
In this case, although ABC is making losses at an individual level, by merging the company with PQR they can absorb their losses and can even report positive profits in the long term.
- We can see that the net profit of the combined entity has absorbed the losses of ABC Ltd and strengthen the financial positioning of the group since it now has a full infra set up along with wide distribution network.
- Thus both the companies which are in the same business line has achieved synergy in the amalgamation process by using each other USB’s and strong points to make a strong merged entity.
- This one company’s weakness can be other company strengths. The horizontal merger gives the merged entity the fuel to scale up the operations and build a strong base in the market by capturing the market share.
A horizontal merger is very much essential for any company to grow and scale-up its business & financial operations in the long run by acquiring a company in the same business line. There are various mergers happening in the industry in order to gain a market share however the synergies of the same should be worked out before taking a decision to merge the other company as all the issues related to that company will get attached to the merged company.
This has been a guide to Horizontal Merger Examples. Here we discuss the top 3 real-life examples of horizontal mergers along with a detailed explanation. You can learn more about finance from the following articles –