Horizontal Merger

A horizontal merger is a merger of two companies that operate in the same industry. In other words, it is when competitors that sell similar products or services become one business entity.

Let’s take a closer look at the horizontal merger, figure out why competitors may want to merge, and compare a horizontal and a vertical merger.

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How does a horizontal merger work?

Let’s imagine two similar companies, offering similar or complementary products and having the same target audience. They can combine their efforts and thus increase their market share.

Legally, such collaboration is possible. Variant one: one company buys the other. Variant two: they unite and build a new company. This is what a horizontal merger is.

The main purpose of a horizontal merger is to increase revenue and market representation. Merged companies have more resources, so it allows them to offer a wider range of products to existing clients without investing in the development of new products or services on your own. They can also win new customers by selling different products, enter new markets, and expand their business to other countries.

Horizontal mergers are exampled by many deals worldwide, like Daimler-Benz and Chrysler in 1998, Disney and Pixar in 2006, Marriott and Sheraton in 2015 and Facebook and Instagram in 2012.

If Pepsi and Coca Cola decided to merge that would be an example of Horizontal Merger of a century.

Types of horizontal mergers

A horizontal merger includes not only a merger with another company under a new brand in traditional meaning but also an acquisition of a competitor

What are the benefits of a horizontal merger?

At first sight, there is no reason why competitors would want to collaborate when they usually try to get ahead of each other. But horizontal mergers are helpful for both companies for the following reasons:

Revenue increase and costs reduction, which is possible due to greater economies of scale. It means that in the long run, one bigger company is more efficient than two smaller companies. For example, an average cost for purchase of commodities is lower because of a bigger amount; a bigger company has more stuff with more expertise for specific tasks; bigger companies can take more serious investment risks that sometimes result in more profits.
Products diversification. Each company has unique products. Through a merger, a company may legally obtain developments and resources of another company to increase its product range.
Increase in market share and reduction of competition. By merging with a competitor a company turns a competitor into a partner. Having fever competitors, it is easier to bring more attention to the products and influence the price-settlement on the relevant market.
Expansion to new markets. If merged companies are located in different cities or countries, the merger allows them to broaden their representation and offer their products to a new public.

Are there any downsides of Horizontal Mergers?

Among some of the cons of Horizontal Merger we can name are:

Regulatory Scrutiny

Of course, this strategy faces the certain level of scrutiny especially from government agencies. Antitrust laws exist in the first place because of big mergers like these. The aim of such laws is to prevent big corporations from mergers that would lead to the monopoly and narrow the competitive market.

Reduced flexibility

As a result of a merger a large organization appears. It means the addition of more personnel, new processes. Thus, it needs more transparency and accountability.

What are the merger guidelines in the UK?

The Competition and Markets Authority (CMA) controls most mergers in the UK. It ensures that the merger doesn’t affect consumers’ interests and doesn’t significantly reduce competition or lead to pricing monopoly. The CMA issued merger guides, which affect both horizontal and non-horizontal mergers:

A quick guide to UK merger assessment provides a simple overview of the merger regulatory system, when and how the CMA’s reviews mergers;
Merger assessment guidelines give a detailed explanation of the CMA approaches;
Mergers guidance on the CMA’s jurisdiction and procedure explains in details, how the CMA acts regarding mergers.

What is the difference between a horizontal and a vertical merger?

A vertical merger occurs between the companies selling and buying from each other like manufacturers and retailers. These companies operate at different stages of a production chain opposite to a horizontal merger where both businesses are similar.

A vertical merger usually combines production and supply, e.g. a paper production plant and a publishing house. It makes the business efficient because the company will always have sure access to important items. As a side effect, it can make difficult for competitors to obtain the same supplies and to give the merged companies a fair advantage.

Companies in the same stage of production merge horizontally, suppliers and developers merge vertically

Key takeaways

Horizontal mergers are possible between companies operating in the same industry and offering the same products or services.
One joint company is more efficient than two smaller competitors.
The Competition and Markets Authority supervises mergers and issues corresponding guidelines in the UK.
Vertical mergers occur between companies form different stages of the supply chain and grow business efficiency by combining supply and development under the same ownership.

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