You may be new to business terms but I am pretty sure that you have come across the term horizontal integration at least once.
‘Horizontal integration is a term in the business world that refers to the acquisition of a business by another business that is operating at the same level of the supply chain either in a similar or a different industry’.
Therefore, for true horizontal integration to actually take place, the company doing a merger must be in the same level of the supply chain with the other.
Here are Some Terms to Help you Understand Horizontal Integration Better;
Horizontal Acquisition is when a company that is in the same industry and operating in the same level of the supply.
The merger is the joining of two equally sizable and competitive companies to create one larger corporation.
Hostile Takeover is the acquisition of another company that does not want to be taken over. This process is always accompanied by a lot of cases, lawsuits, and scandals. An extraordinary amount of money is offered in a hostile takeover.
If a brick making company merges with another brick making company, this is a perfect example of horizontal integration. These two companies are at the same level of the supply chain which is the manufacturing level. However, when a Brewery acquires or does a merger with a corn farm that cannot be considered as horizontal integration since the two companies belong to different levels of the supply chain
Through horizontal integration, businesses can venture into new markets, expand in their current markets and increase their power over market power over the chain of supply. It can also make businesses achieve higher profit margin by merging together and creating a powerful presence in the market.
Horizontal integration can also happen in other ways apart from a merger or an acquisition. A company can decide to set up a new and semi-autonomous business which is independent in terms of operations but tied down to the parent company through policy. Mergers and acquisitions are however the main methods used by the majority of companies in the contemporary business world to achieve effective horizontal integration.
Horizontal integration has been the norm in the business world in the last two decade as large companies try to fight off competition from significantly well-performing rivals. When large corporations have no means of beating competition from their rivals, they propose mergers in order to sustain the growth of these rival companies which if left to compete favorably, will eventually bring them down.
Sometimes a horizontal merger is suitable when an upcoming company shows promise and therefore larger and more established corporations will want to the merger in order to make a name. Sometimes companies do mergers when they see that a certain startup or firm can help them in their operations. A good example is where Facebook merged with Instagram earlier this decade. The move was seen as an attempt by Facebook to take over a company that would eventually help the social media giant in achieving its mission.
Perfect Conditions for Horizontal Integration
It’s not every company that can decide to do a merger and succeed since there are certain situations that favor horizontal integration. Thus, horizontal integration can be a good strategy when;
- Economies of scale would be suitable
- The company has an edge in resourcefulness over the other companies i.e. adequate capital and expertise
- The merger would lead to a monopoly that is allowed by the legal system
- The organization exists in a very competitive environment
- The company has enough funds to acquire or merge with their rivals
Examples of Horizontal Integration
After looking at the definition and how it happens, we can now have a better insight at the real-world examples of horizontal integration that have happened;
- Facebook and Instagram are one of the most popular mergers in this millennium. The social media giant merged with Instagram in 2012 for a whopping amount of $1 billion. The two companies operated at the same level of supply level. Facebook saw the acquisition as a perfect strategy to increase its dominance in the social media industry and gain new audiences. So far, the merger has proved to be an overwhelming success given that Facebook has grown massively since then.
- The Exxon Mobil merger is the largest in the energy sector the world has ever seen. It involved the two largest energy companies in the USA and led to their domination in the energy sector. The Merger was reported to cost Exxon a whopping $75 billion.
- The Vodafone Mannesmann merger is the largest merger in the history of corporate history. Vodafone became the largest mobile operator in the world after this merger. The merger cost Vodafone $180 billion!
- AT&T and Bellsouth merged in 2006 to make AT&T the largest wireless company in the world at that time. The merger cost AT&T $86 billion and it allowed the company to diversify its products all over America. This made AT&T a major player in America then and that dominance continues up to now.
Advantages of Horizontal Integration
Horizontal integration is a very effective strategy for businesses in a very competitive field of operation.
Here is how a horizontal integration strategy can be beneficial.
- The overall costs of operation will be considerably cheaper. This is due to the economies of scale that result from the expansion of a company. A larger company has a very low cost per unit of production since they have better bargaining power among suppliers. They buy goods in bulk and the prices are therefore discounted. This translates to lower costs of operation and thus a higher profit margin for the merged companies.
- The company can achieve a higher power in the market. This is because the two companies share resources and their customer base.
- It considerably reduces competition for the parent company. In most cases, mergers are primarily done to tame competition from the rivals. The company can now focus on improving the quality of goods and services instead of formulating ways of beating off competitors.
- Horizontal integration can bring about increased differentiation. It will offer diversity in the production of goods and services to a market since a larger corporation can easily make a great array of goods easily and sell them to a larger market.
Disadvantages of Horizontal Integration
Horizontal integration is great but it can be detrimental to a certain extent;
- There will be a very tough transition change since two companies with unique policies are forced to work uniformly.
- Mergers often lead to a lack of competition since there is a reduced number of companies in the industry. Mergers happen within the best performing companies in an industry leaving behind a very corporation with considerably weaker companies. With this, companies can make changes without any hesitation. This is largely disadvantageous to consumers who have to grapple with increased prices or low-quality goods and services.
- There are very many legal constraints that slow down and sometimes block the process of horizontal integration since the state fears that monopolies of private companies will largely be exploitative and undermine its power.