What is horizontal integration
Horizontal integration is the acquisition of a company operating at the same level of the value chain in a similar or different industry. This contrasts with vertical integration, where companies thrive in upstream or downstream activities, which are at different stages of production.
Breaking horizontal integration
Horizontal integration is a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, increase product differentiation and help companies develop their market or penetrate new markets. By merging two companies, they may be able to generate more revenue than they could have independently.
However, when horizontal mergers succeed, it is often at the expense of consumers, especially if they reduce competition. If horizontal mergers within the same industry concentrate market share on a small number of companies, this creates an oligopoly. If a company ends up with a dominant market share, it has a monopoly. That is why horizontal mergers are subject to scrutiny under antitrust laws.
Benefits of horizontal integration
Companies engage in horizontal integration to benefit from synergies. There may be economies of scale or cost synergies in marketing, research and development (R&D), production and distribution. Or there may be economies of scope, which make the simultaneous manufacture of different products more profitable than their manufacture alone. The 2005 acquisition of Gillette by Proctor & Gamble is a good example of a horizontal merger that has resulted in range savings. As the two companies produced hundreds of hygiene-related products, from razors to toothpaste, the merger reduced marketing and product-by-product development costs.
Synergies can also be achieved by combining products or markets. Horizontal integration is often driven by marketing imperatives. Diversifying product offerings can provide cross-selling opportunities and increase the market for each business. A retail business that sells clothing may decide to also offer accessories, or may merge with a similar business in another country to locate there and avoid having to build a distribution network from scratch .
The real reason behind many horizontal mergers is that companies want to reduce “horizontal” competition in the form of surrogate competition, competition from potential new entrants and competition from established rivals. These are three of the five competitive forces that shape each industry and are identified in Porter’s Five Forces model. The other two forces, the power of suppliers and customers, drive vertical integration.
Disadvantages of horizontal integration
Like any merger, horizontal integration does not always produce the synergies and added value expected. It can even lead to negative synergies that reduce the overall value of the business, if the large business becomes too cumbersome and inflexible to manage, or if the merged businesses experience problems caused by very strong leadership styles and corporate cultures. different. And if a merger threatens competitors, it could attract the attention of the Federal Trade Commission.
Examples of horizontal integration
Examples of horizontal integration in recent years: acquisition of Sheraton (hotels) by Anheuser-Busch InBev in 2020 by Marriott of SABMiller (brewers), acquisition by AstraZeneca of ZS Pharma (biotechnology) in 2020, acquisition of Porsche (cars) by Volkswagen in 2020, acquisition of Facebook in 2020 by Facebook of Instagram (social media), acquisition of Pixar (entertainment media) by Disney in 2006 and acquisition of Arcelor (steel) by Mittal Steel in 2006.