Horizontal merger refers to the merger that occurs between the organizations that operate in the same or similar industries and generally the competitors in the industry opt for such type of mergers for reasons such as to increase the share in the market, to bring economies of scale, to reduce the level of competition, etc.
Horizontal Merger Definition
A horizontal merger is a type of merger that happens between companies operating in the similar line of business or the same industry. In other words, a horizontal merger happens when companies which offer same or similar products or services come together under single ownership. Most companies going for such type of merger are competitors operating in the same industry.
Companies go for a merger for many reasons, both financial and non-financial. Horizontal mergers are usually considered for non-financial reasons. However, these type of mergers is more closely monitored by the government since it may lead to a decrease in competition in the industry and may also to oligopoly.
Why do Companies go for Horizontal Merger?
Below are the reasons why companies go for the horizontal merger.
#1 – Economies of scale
A merger usually occurs when it is expected that the combined entity will have more valuation than the combined valuation of individual entities. Same is on account of synergies achieved between the 2 companies on account of the merger. Companies go for the horizontal merger in order to bring in economies of scale by cost reduction. Reduction of cost may occur by the elimination of redundant processes, operations or manpower costs. Thus, the company can offer a wider range of products or services in a more efficient and cost-effective manner.
#2 – Reduction in competition
Companies may also go for Horizontal merger in order to reduce competition. Thus, it may also lead to the consolidation of a fragmented industry.
#3 – Increase in Market Share and Operating Revenue
A horizontal merger is an inorganic method of growth for a company. When two companies providing same/similar products or services having their individual market share and audience in the market combine to become a single entity it leads to an increase in market share and thus increases in revenue.
#4 – Faster Growth
Inorganic growth is a faster method of growth than organic growth. Thus, companies looking out for faster methods of growth usually go for Horizontal merger. If a company is looking out to increase its product range or market share or to increase its geographical reach without investing time and resources to develop it from scratch, it may go for such merger.
#5 – Business Diversification
Companies may go for horizontal mergers in order to seek for business diversification both in terms of product/services range and geographical presence. It may also help a company to enter a new market and to increase its reach demographically.
Horizontal Merger Example
A hypothetical example of a horizontal merger may be of Hindustan Unilever and Patanjali. Though both of them operate in the FMCG market, both of them have different product ranges aimed at different demographics of people. Thus, the merger may help them to offer a wider range of products, will increase their revenue substantially and will lead to an increase in market share.
Another hypothetical example of a horizontal merger might be a merger of two car manufacturing companies- one operating in the small car segment and other operating in the large and luxury car segment. The target audience for both the companies would be different and thus their merger will help them to diversify their business into different demographics of people thereby increasing their market share in the automobile industry.
What are the Issues Faced in the Horizontal Merger?
- Cultural Integration difficulties: Cultural issues are usually faced in all types of mergers but are especially evident in horizontal mergers. Since the 2 companies operate in similar or the same industry, they both have similar process and functions, but might have different ways of handling things. Thus, different cultures of the two companies further make it difficult for them to co-exist.
- Different management styles: Since the management styles of both the companies must be different, a merger may lead to clashes in both the management and may lead to an unsuccessful merger.
- Might create a Monopolistic Market: Horizontal mergers may also create a monopoly in the market if two of the biggest players operating in that industry merge together. For example, if a company having a 35% market share merges with a company having 15% market share, the combined entity will have a 50% market share, thus majorly reducing the competition. Any further increase in market share of the combined entity will create a monopoly in the market which may lead to unfair market practices.
- Product Cannibalization: Merger of two companies operating in the similar industry may also lead to product cannibalization of either company. If we consider the earlier example of the merger of Patanjali and HUL, considering people are becoming more and more concerned about organic and natural products, products of Patanjali like shampoo may eat in the market of shampoos of HUL.
This was a Horizontal Merger guide. Here we look at its definition, why are companies going for the horizontal merger? An example to better understand it, too. You can find out more about these articles-