What is a horizontal merger?
A horizontal merger is an industry-related company consolidation. Higher competition among similar companies leads to better synergies and market share gains for merging enterprises. Mergers often occur when larger organizations seek to achieve economies of scale. On the other hand, a vertical merger occurs when enterprises from distinct supply chains collaborate to improve production efficiency and cost.
How Horizontal Mergers Work
A horizontal merger might provide a corporation with competitive benefits. A horizontal merger will increase market share if one business provides similar items.
The merging company may offer more products if one firm makes complimentary items. Merging with a firm that sells different items to a different market helps the new company diversify and explore new markets.
Horizontal vs. vertical merger
Vertical mergers aim to boost efficiency or cut costs. Vertical mergers occur when two firms that sell or buy each other merge. Businesses are usually in different phases of manufacturing. For instance, a company and its distributor may combine.
A vertical merger can secure essential supplies and save expenses by removing the need to recruit suppliers, negotiate arrangements, and pay market pricing. A vertical merger can boost efficiency by coordinating production and supply and ensuring product availability. Vertical mergers may make it harder for rivals to get essential suppliers, raising their entry costs and lowering their earnings.
Examples of horizontal and vertical mergers
Horizontal merger
Adobe purchased Figma, a renowned web-first collaborative design tool, in September 2022. Adobe claims the merger will “usher in a new era of collaborative creativity.”
Figma’s objective was to pioneer web-based product design at the merger. Adobe likewise worked in digital experiences, but their business was different. Photoshop could only develop prototypes, whereas Figma was just for online and app design. Combining firms gave Adobe access to a new market.
First Horizon and TD Bank Merge Vertically
In January 2022, Microsoft acquired Activision Blizzard. Microsoft already had the famous Xbox brand, so the acquisition allowed them to supply robust, unique content to video gamers.
Satya Nadella said Microsoft bought Activision Blizzard “to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive, and accessible for all.” Microsoft’s Game Pass would gain infant, more diversified content from the transaction. The purchase still needs FTC clearance as of July 2023.
Special Considerations
A horizontal merger of two industry leaders may be preferable to spending time and money creating products or services individually. Offering new items to current clients can boost revenue in a horizontal merger. Horizontal mergers reduce customer choice.
If one pre-merger firm has distribution facilities or clients in areas not covered by the other, the business may be able to sell to separate regions. Horizontal mergers also limit market competition. The new firm may have more resources and market share than its competitors, giving it more price power.
Potential Horizontal Merger Drawbacks?
Horizontal mergers restrict competition, raise prices, impede innovation, and limit customer choice. Regulatory scrutiny is needed to ensure the merger does not undermine competition, and social issues might arise when merging two organizations with differing company cultures and activities.
How do horizontal mergers affect market competition?
Horizontal mergers can significantly affect market competitiveness. The combined business may gain market strength by decreasing industry competitors, resulting in higher pricing, less product differentiation, and fewer customer options. Before authorizing horizontal mergers, regulators check for monopolistic or anti-competitive impacts.
Can vertical mergers help small businesses?
Vertical mergers affect small firms differently. Small firms may profit from better distribution channels or ties with vertically integrated organizations. Vertical mergers can be problematic if small firms confront more incredible rivalry or hurdles to entering combined entity-controlled markets.
Do vertical mergers promote innovation?
Vertical mergers can boost or hinder innovation. Integrating value chain phases may encourage cooperation and information exchange, improving product development and innovation. However, vertical mergers that give corporations market strength and less competition might decrease innovation.
The Verdict
Horizontal mergers combine firms in the same industry and production or distribution stage. The mergers aim to expand market share, remove competition, and generate economies of scale. In contrast, vertical mergers include enterprises at distinct phases of manufacturing or distribution. They integrate suppliers or customers to simplify operations, obtain value chain management, save money, and synergize.
Conclusion
- Companies in the same industry combine horizontally.
- They frequently create one dominant corporation instead of two, eliminating competition.
- Horizontal mergers can boost sales by expanding product and service offerings.
