Are you looking to understand horizontal mergers, including horizontal merger definition and horizontal merger examples? Then, you've come to the right place.
Did you know that there were 264 requests for horizontal mergers during a 15-year period, according to a study conducted by the Federal Trade Commission? These requests are among a mountain of business strategies that companies are using to get ahead in the market.
Horizontal mergers fall among other business deals like vertical, conglomerate, and concentric mergers. Historically, these business deals have helped businesses across the United States boost their business growth and foster innovation.
Below is everything we will cover. Feel free to skip ahead.
- What is the horizontal merger definition?
- How does a horizontal merger work?
- Common reasons for a horizontal merger
- The horizontal merger process
- The advantages and disadvantages of a horizontal merger
- Horizontal merger examples
What is the horizontal merger definition?
A horizontal merger occurs when two companies in the same industry come together. Both companies should be selling similar products and services.
Many horizontal mergers come about as a way to make the two companies stronger. The merger works on the premise that two are better than one.
Some people refer to this merger as a case of one plus one. However, with a horizontal merger, one plus one equals more than two.
These equations and comparisons will make more sense as we unravel more about the definition of a horizontal merger.
How does a horizontal merger work?
Horizontal mergers work well because both companies produce similar products/services. And, both companies stand to gain from the merger.
Because the two companies are so similar, both companies can learn a lot from different aspects of production. They've been making the same things, so each company can share what they've learned along the way.
Plus, each company can share one another's customer base now.
Common reasons for a horizontal merger
Horizontal mergers aren't small changes. In fact, it may take years and years to agree to this kind of deal. But, there are many reasons that horizontal mergers take place.
Often, companies that are undergoing a horizontal merger want to reduce competition in the industry. Less competition leads to a larger market share. And, it means that the larger company will have more power over pricing within the industry.
It's important to note that some horizontal mergers are illegal because of these benefits. There are laws in place to prevent companies from becoming monopolies or oligopolies.
By conducting a horizontal merger, the two companies will experience a significant period of growth as they're becoming one. And, even after the merger is final, the more prominent company will bring in better numbers than either smaller company did.
Since the larger company has access to more resources, it has to ability to perform better than either of the smaller companies. So, undergoing a merger is often a business strategy for growth.
Buy in bulk
Since the resulting company is much larger than the two individual ones, there are also some economic reasons behind merging. Larger businesses save more per product during production. This is because they can buy their materials in bulk.
Overall, these economic advantages reduce the costs throughout the supply chain. This means that the larger company would have more financial gain than both of the smaller companies combined.
Can you see why one plus one is more than two?
Increase customer base
When two companies merge into one, they're combining their customer bases. While a few customers may get lost during the merger, far more customers join the audience.
Plus, a new company means new opportunities to bring in even more customers. So, this new company can break into new markets by selling more products and services. Thus, they could bring in even more customers.
This increase in sales will advance the business even further.
Gain additional resources
The biggest motivation behind horizontal mergers is an increase in company resources. With two smaller companies working together, the larger company can do more.
Having more resources can also lead to even more innovation. You have a lot to work with initially, but these resources will help you get even more.
By combining forces, the two companies involved in the merger will be able to advance their business further technologically. Thus, they can innovate faster and enter into new markets.
The horizontal merger process
Every horizontal merger deal is different. But, there is a general process that needs to happen every time two companies come together via a horizontal merger.
You can use these steps as a guideline. But, you should add, remove, and edit steps as your company need to. These particular steps may not help you with your specific goals.
- Create and communicate the goals and strategies behind the merger
- Identify and gather information about potential targets for the merger
- Create and fortify relationships with these potential targets
- Start evaluating and negotiating
- Perform due diligence while keeping the goals of the merger in mind
- Complete the purchase and sales statement
- Implement strategies while keeping merger goals in mind
By following this M&A process, you'll ensure that you're keeping the merger's goals in mind the entire time. Often, our judgment can become clouded by our emotional and personal feelings about the brand. The emotional sentiment is excellent for a strong bond, but the purpose of the merger is for business reasons.
To ensure that you're keeping your goals in mind, you should consider maintaining the goals that you've set fresh only your mind. You can write it on a sticky note or send reminder emails to your team each week.
Do whatever it takes to make sure that your company is staying in line with its missions.
Following legal guidelines during a horizontal merger
Horizontal mergers are a big deal. They affect the market and all of the businesses and consumers within that market.
So, the government watches these kinds of deals very closely. They want to make sure that companies aren't turning into monopolies or oligopolies.
To be clear, a monopoly is when one company dominates the market. An oligopoly is when a few companies dominate the market.
Either one of these isn't good.
To avoid these kinds of practices, the Department of Justice and the Federal Trade Commission established guidelines related to horizontal mergers. These will help companies avoid breaking the rules that the government has established around this kind of deal.
In particular, the government is looking to break up mergers that are harmful to the market while not disturbing beneficial or neutral ones. Here are some of the guidelines that you should keep in mind:
- Are there are immediate anticompetitive effects of the merger?
- Can we predict any future anticompetitive effects of the merger?
- How does this merger compare to previous mergers?
- What level of competition do both companies share in the market before the merger?
- How will the merger impact customers?
- Will reduced competition affect innovation in the market?
These questions can get pretty extensive. But, they're here to protect consumers and other businesses.
So, it would be best if you never tried to work around them. Keep them in mind and refer to them throughout the merger to ensure that you're staying compliant.
Using effective methods during a horizontal merger
If you're looking to create a strong merger, you should look within your own local or regional area. This is the strongest method for creating a horizontal merger.
It would help if you also kept in mind that horizontal mergers aren't isolated to the top end of the market. Smaller companies have a lot to gain from merging with other companies, big or small.
And, if you've been keeping an eye on the competition, it's likely that you know some of these competitors anyways. Merging with any one of these companies could help you get the opportunities and innovations that you're looking for.
The advantages and disadvantages of a horizontal merger
If you're considering undergoing a horizontal merger, you must think about the impacts. How is this going to positively and negatively impact your business? And, do the positives outweigh the negatives?
Let's look at a few things you should consider.
The advantages of a horizontal merger
The main advantages of a horizontal merger come about because of the scaling of your business. After the merger, your business is going to grow. So, you're going to be able to take advantage of some things that only larger companies can take advantage of:
- Buying in bulk from suppliers and save money by doing it
- Paying less in manufacturing costs per unit
- Increasing numbers of staff
- Improving the financial condition of the business
- Accessing a more extensive customer base
All of these benefits come with the territory of a more significant business. You'll have the resources and capital that you need to become even more successful.
The disadvantages of a horizontal merger
On the other hand, there are always some downfalls with a business decision like this:
- The US government may send in antitrust agencies to evaluate the horizontal merger closely
- Some horizontal mergers may blind companies from seeing future trends in the industry
- Larger companies may have problems with organizing and maintaining control across the company
- Companies that have merged are more likely to overpay during the process because of desperation
- Larger companies are at risk for reputational losses
As you approach your horizontal merger, you should keep these issues in mind. As long as you know what you're up against, you'll have a better chance at recovering.
Horizontal merger examples
The idea of horizontally merging two companies isn't anything new. Many companies have undergone a horizontal merger. And, you've likely heard of them:
- Disney and Pixar
- Exxon and Mobil
- Microsoft and LinkedIn
- Amazon and WholeFoods
- Delta and Northwest
We could go on and list several companies that have already taken advantage of the benefits of horizontal mergers. Several technology companies have taken part in horizontal mergers. But, let's talk about how these companies benefitted from their mergers.
Disney and Pixar
Disney bought Pixar in 2006. Because of the level of talent and skill that Pixar demonstrated, Disney wanted to conduct a horizontal merger.
With this merger, Disney was able to take advantage of Pixar's resources. And, they've been releasing more movies since then.
Plus, Disney was able to reduce competition by buying Pixar. What was once a competitor became a partner.
Exxon and Mobil
The Exxon and Mobil merger created the largest oil company in the world. Because of the new company's size, they could take advantage of cut costs and greater profits.
And, there was reduced competition. One of the companies that they were competing with no longer exists. Therefore, the companies perform better as one.
Microsoft and LinkedIn
The merger of Microsoft and LinkedIn is another example of a horizontal merger. LinkedIn approached Microsoft about the merger in an effort to take advantage of their technologies.
Together, Microsoft and LinkedIn have access to one another's innovations. Thus, they can grow bigger and better together as a larger company.
Amazon and WholeFoods
We can see how a larger company can benefit from merging with a smaller company for this merger. Amazon sold groceries before the merger, but they also sell many other products.
WholeFoods is much smaller, but the company specializes in groceries. So, by merging with them, Amazon can take advantage of the expertise that WholeFoods has.
And, WholeFoods benefits from Amazon's customer reach and delivery methods.
Delta and Northwest
The merger of Delta and Northwest allowed each of these companies to take advantage of the resources from the other.
Delta was able to break into new markets and benefit from Northwest's advanced marketing strategies. At the same time, Northwest gained the regional reach that Delta has.
Collaboration across companies
Now that you know all there is to know about the horizontal merger definition, it's time to talk about how you can save yourself from the disadvantages. As your company grows after the merger, you may find issues in communication.
Luckily, we have something for that. Our all-in-one collaboration platform built for M&A can help your staff get more organized than they ever have been.
Whether they're worried about big projects or daily tasks, our platform can handle it.
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