What is a Horizontal Merger?

//What is a Horizontal Merger?
What is a Horizontal Merger? 2017-10-04T23:08:39+00:00

Definition: A horizontal merger, also known as horizontal integration, is the combination of two companies that compete in the same or in a similar industry. In other words, it occurs when one company buys out its competitor or they agree to join forces and create a new combined company.

What Does Horizontal Merger Mean?

What is the definition of horizontal merger? This business strategy is used by a firm that seeks growth through acquisitions. Most mergers take place in highly concentrated industries where fewer firms compete, and the synergies are favorable. Because the two firms compete on the same stage of the supply chain, they are able to develop economies of scale by combining operations.

In the long-run, they are able to increase their market share and lower their marginal costs. Furthermore, they can offer a wider range of products to their customers without having to invest in new resources.

Let’s look at an example.

Example

A potential merger between Pepsi and Coca-Cola would be one of the mergers of the century. Both companies compete in the same industry, and the combination would create a new, larger company with a higher market share. Furthermore, as the two firms have very similar operations, a horizontal integration would allow them to lower their costs. This would be the case for McDonalds and Burger King or for Daimler-Benz and Chrysler as well.

On the other hand, mergers between large organizations are perceived as monopolistic. A firm that capitalizes on its financial, technological, and human resources can become a monopoly. Also, if one firm has 35% of the market and the other firm has 15% of the market, the new firm will have 50% of the market. This is a relatively unfair competitive advantage for these firms as they create an oligopoly through merging.

If two smaller companies merge horizontally, the effect on the market won’t be too strong. For instance, a small dairy with the know-how and the capital seeks to capitalize on the distribution channels of a competitor to further expand its activities. This type of combination won’t cause any ripple effects in the industry.

Summary Definition

Define Horizontal Merger: Horizontal mergers means two businesses within the same industry combine together to make a bigger company that operates in the same industry.