Advantages of Horizontal Integration
The horizontal integration strategy may be employed for several reasons, including the following:
To gain production efficiencies by producing more units at central manufacturing facilities.
To gain purchase volume discounts by buying raw materials in bulk
To plug holes in the product line of the acquirer with products made by the acquiree
To gain sufficient mass in the marketplace that the resulting combined company may make price increases stick
To eliminate duplicative positions within the companies, thereby stripping out costs
Disadvantages of Horizontal Integration
As is the case with any merger, there is a risk that a horizontal merger will not result in the expected cost savings and revenue enhancements. In many cases, a merger drives away key employees, resulting in an overall decline in the value of the combined businesses. This risk is enhanced when the firms have differing company cultures, so that the employees of the acquired entity become unhappy with the culture of the acquirer that is being imposed on them.
Anti-Trust Aspects of Horizontal Integration
If there are several horizontal integration mergers within the same industry that concentrate market share with a small number of companies, this is considered an oligopoly. If the resulting market share is largely held by one entity, this is considered a monopoly. In either case, the acquirer may be investigated under anti-trust laws, and a proposed acquisition may be rejected.
The Difference Between Horizontal and Vertical Integration
A different type of merger is vertical integration, which is when companies merge that are in different positions in the value chain. For example, a car manufacturer could buy a producer of car tires, in order to secure this input to its production line. The key difference between the horizontal and vertical integration concepts is that horizontal integration occurs among similar businesses, while vertical integration occurs between suppliers and customers.
