Horizontal integration often entails similar companies coming together, while vertical integration often entails different companies related to a similar product coming together. Bank of America was born in this wave of mergers and acquisitions when Nations Bank horizontally merged with Bank of America in 1998 in a $62 billion deal. This business strategy doesn’t involve M&A but rather new product developments or investment in existing activities, such as geographic expansion. The South Korean appliance and consumer electronics company expanded its operations to over 200 countries to reach new markets and broaden its now global customer base. Vertical integration occurs when a company acquires a company outside of their current position along the supply chain. For example, a manufacturer may acquire a retail company so that the manufacturer can not only control the process of making the good but also selling the good as well.
Economies of Scale
Companies looking to grow in size, increase revenue, expand to new product lines, and diversify operations may consider pursuing horizontal integration. Horizontal integration occurs when similar companies merge in the same stage of a supply chain merge. As opposed to a vertical integration which helps a company shift to earlier or later in the supply chain, horizontal integration further solidifies a company’s current position along a manufacturing process. But such a strategy may sometimes create a monopoly in case the new entity is successful in capturing a large part of the market. Horizontal integration is a type of M&A transaction that occurs when similar companies operating in the same industry at the same stage in the supply chain merge.
What Is the Difference Between Horizontal Integration and Vertical Integration?
Procter & Gamble’s 2005 acquisition of Gillette is a good example of a horizontal merger that realized economies of scope. Because both companies produced hundreds of hygiene-related products from razors to toothpaste, the merger reduced the marketing and product development costs per product. Similar to a merger, an acquisition occurs when one company outright takes over the operations of another company. Though the two companies technically join together, one company remains in control.
Compared to vertical integration, which helps a company move earlier or later in the supply chain, horizontal integration strengthens a company’s present position along a manufacturing process. At its core, horizontal integration is the term used to describe the merger of two or more corporations that operate in the same areas of production. In layman’s terms, it means that a company has bought out and absorbed another that is a direct competitor. One of the major problems with horizontal integration is that it can result in a monopoly if done in a way that won’t allow for competition. However, many companies have been saved through horizontal integration and rolled into a larger, more successful company. The dynamics of many industries mean that the market can only support three to four large companies.
United Parcel Service (UPS)
The other two forces, the power of suppliers and of customers, drive vertical integration. However, when horizontal mergers succeed, it is often at the expense of consumers, especially if the merger reduces competition. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws. In this way, the airlines were able to provide more service to customers while also streamlining their processes. Stakeholders benefited when the companies initially merged, and once the two were completely combined, United Continental Holdings became the largest airline in the world.
In many instances, news stories involving mergers and acquisitions refer to horizontal integration. This is because horizontal integration examples in media refer to a company increasing its production, whether of goods or of services. To truly fall into this category, this increased production must occur in the same part of the supply chain. Horizontal integration can involve mergers and acquisitions or it may refer to a company that has grown via internal expansion.
How Horizontal Integration Relates to Business Profitability
- For example, Microsoft specifically wanted to enhance its presence in the video game market.
- Horizontal integration involves a business obtaining another that produces the same or similar products and services.
- It is a business strategy in which entities try to grow and expand at the same industry level.
- This business strategy doesn’t involve M&A but rather new product developments or investment in existing activities, such as geographic expansion.
Together, the merged entity will have a total asset that is much more than their assets individually. When merged through horizontal integration, companies that used to compete can cut back on any products that are not performing well in the consumer market and focus on their strongest performers. DealRoom provides an end-to-end solution to support every aspect of horizontal and vertical integrations, ensuring you can navigate the complexities of M&A confidently and precisely.
As a result, horizontal integrations become a popular means of acquiring market share. A horizontal monopoly involves horizontal integration to the point that the combined businesses entirely or nearly completely control a specific step in the supply chain. The company will likely fall under regulatory scrutiny in these cases, as creating a horizontal or vertical monopoly is usually considered an illegal business transaction. The deal was just one of a series of transactions the company conducted to achieve that level of examples of horizontal integration scale. Since then, the company has moved into vertical mergers, acquiring several technology and pharmaceutical services firms, but the Albertsons deal was the biggest horizontal acquisition CVS has ever made.
If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly. If a merger threatens competitors or seems to drastically restrict the market and reduce consumer choices, it could attract the attention of the Federal Trade Commission. It has the power to impose Antitrust laws, disallowing the merger if it perceives that it would lead to situations that are against the public interest. As a result, horizontal mergers are most common among companies in a mature cycle stage, increasing market share and efficiency.
For example, the 2023 merger of Elance and O Desk was far removed from any regulator’s scope or attention, though it created a giant in the online freelancing industry. As stated above, M&A teams will seek this kind of deal if there are economies of scale, as the increased production must lead to significant cost advantages across the value chain. In a merger, both companies are striving to become a larger presence in their existing market. Most mergers are of similar firms, where integration of the two companies may be seamless due to the similarities between what the two former companies used to do. The combined entity of Arcelor-Mittal is the world’s largest steel producer. It was so named from the companies that joined together to create it, Arcelor SA and Mittal Steel Company.
Scale is a powerful tool in the arsenal of pharmacy chains because it means they can pressure pharmaceutical manufacturers for more favorable prices. The biggest pharmacy chain in the United States, CVS, achieved scale through acquisitions of smaller local, regional, and national pharmacy chains. An acquisition occurs when a company buys another firm and folds its operations into its own. From the 1970s onwards, Santander’s acquisition of multiple regional and national banks helped the company become a global retail banking giant.
However, the organization began to lose market share starting in the 1980s due to increased crackdowns by regulatory agencies and changing consumer preferences. Both horizontal integration and vertical integration are the practice of a company expanding its current operations. Horizontal integration occurs when a company aims to remain within its current part of the supply chain.
In March 2015, Kraft acquired Heinz to become the Kraft Heinz Corporation (KHC). One of the first things that KHC did was to make cuts in any existing redundancies in an effort to boost profits. According to McKinsey, the total value of larger deals (valued greater than $25 million) for the year peaked at $5.9 trillion, up 37% from 2020.
- Horizontal integration is the strategy of acquiring other companies that reside along a similar area of the supply chain.
- This business strategy enables the acquiring company to expand its reach in a sector it already serves without forming an entirely new entity from the ground up.
- Most mergers are of similar firms, where integration of the two companies may be seamless due to the similarities between what the two former companies used to do.
- In 2004, the United States Department of Justice ordered the company to pay $10 million after it pleaded guilty to illegally fixing diamond prices.
- Both horizontal integration and vertical integration are the practice of a company expanding its current operations.
For example, Microsoft specifically wanted to enhance its presence in the video game market. This example of an acquisition shows an often deliberate strategy for a specific sector in which a company wants to achieve a very specific goal. These are three of the five competitive forces that shape every industry, as identified in Porter’s Five Forces model.
This is in contrast to vertical integration, where firms expand into upstream or downstream activities, which are at different stages of production. Century Industries has decided to integrate its business with Wood Color to eliminate competition, gain better market share, and take advantage of Wood Colour’s better product designs and supply chain management. Wood Color will also have the advantage of a huge customer base and access to the market for office furniture. This merger proved extremely beneficial to both companies, even without merging the “houses” that produced the animation. Pixar’s innovation, when combined with Disney’s formulaic storytelling method and top-notch character marketing, led to both increased market shares and spikes in profits.