Typically, a horizontal integration occurs when one company purchases another which works within the same industry or produces a similar product. These companies are considered to be on the same level, hence the term ‘horizontal integration’. Businesses choose horizontal integration as it offers the possibility for business expansion and the ability to optimize their activities and production opportunities. It can also result in a company having a monopoly over other businesses by means of eliminating the competition from their industry. A horizontal integration process enables a company to enhance its own profits and those of its partners in ways that would not be possible if the two companies competed. It also helps to lower costs and creates growth by sharing combined knowledge and experience.
Horizontal Integration vs Vertical Integration
Although similar, there are some key differences between horizontal and vertical integrations.
Vertical Integration
Occurs when a business purchases another company within the same production path but is not on the same level as themselves The objective is to strengthen the supply chain Often investment will be lower when compared to horizontal integration Results will often include a reduction in wastage and production costs
Horizontal Integration
Occurs when a company buys out another business that is operating within the same market as themselves and is on the same level The objective is to broaden reach and increase the size of the business Often, the investment will be larger when compared to vertical integration Results will often include the elimination of competitors to gain a maximum share of the available market
Advantages and Disadvantages of Horizontal Acquisition
Whether or not a company chooses horizontal integration will depend on a variety of factors, some of which are only relevant to their business or industry. There are, however, a variety of advantages and disadvantages to consider, which are relevant in most cases.
Advantages
Larger Market Share
When an integration is successful, it results in one company having a larger share of the market compared to its competitors.
Broader Customer Base
In theory, a horizontal integration will mean that one company gains all of the customers of the other. This presents the opportunity for more sales and access to a broader client base.
Increased Revenue
An increased market share and broader customer base will often mean that revenue is increased. This is because there are more opportunities for customers to purchase a product.
Reduction in Competition
Integrating one company within another automatically reduces the amount of competition within a market.
Increased Production
Successful horizontal integration will often mean that a company is able to increase production. This is done by utilizing the skills, technologies and techniques of the integrated company alongside existing facilities. Having a company that holds a monopoly over a market can have a negative impact on consumers. For this reason, there are rules and legislation relating to fair competition which aim to ensure that there is always competition within a market to create a fair environment for the consumer.
Reduced Flexibility
A side effect that is found in many large businesses is a reduction in flexibility. This is because there are more parts and obligations to consider. It is also often the case that as a company grows, there is also a greater need for transparency. This will often result in more red tape to deal with to make changes happen, slowing down and complicating the process.
Potentially Little or No Increase in Customer Base
As horizontal mergers occur with businesses that work within the same industry or markets, there is the potential that there could be some customer overlap. This may mean that they don’t see a surge of new customers as some of them will already be existing clients. This is more likely to occur when a horizontal integration process is happening between two very similar businesses which offer the same or like-for-like services and products.
Examples
Disney
One of the most easily recognizable examples of horizontal integration was the acquisition of Pixar by Disney in 2006. Before the companies merged, Disney was stagnating and required rejuvenation. By combining the two animation companies and merging their skills, Disney was able to increase their market share and make use of the technology available at Pixar to increase their profitability.
Marriott International Inc.
Another example would be when Marriott International Inc. acquired Starwood Hotels and Resorts Worldwide Inc. in 2016. This combined the luxury reputation held by Marriott with the worldwide presence of Starwood. The result was that Marriott became the world’s largest hotel and restaurant company, with over 7,000 sites globally.
When Facebook purchased Instagram in 2012, it was to gain an advantage on the social media markets over competitors. Through the acquisition, Facebook was able to strengthen its position within the markets, increase its audience and reduce competition with other social media platforms. Facebook acted to further cement its position within the social media markets with the horizontal integration of WhatsApp in 2014. This move once again increased their audience and reduced competition within the market.
Vodafone
In 2000, Vodafone took part in the largest merger in corporate history when they merged with Mannesmann for approximately $180 billion. This, combined with a series of other acquisitions, led to them becoming the largest mobile phone operator in the world. They currently have the most extensive wireless coverage in Europe and operate in more than 30 countries.
Final Thoughts
Within the world of business, there are always risks and challenges. Horizontal integration can lead to growth and innovation but should not be taken without due consideration. There will be risks involved, and there is always the potential that the gamble won’t pay off. Before undertaking the process of horizontal integration, it is important to ensure that it is the best possible option for a company and not subject to competition legislation or likely to suffer from other setbacks. As long as enough research and analysis are done ahead of the acquisition, a horizontal integration process can be a good choice for companies to make. There is the potential to increase efficiency, revenue and growth. However, it is vital to be aware of potential disadvantages that can occur and weigh them against the benefits before making a decision.
