What are Horizontal Mergers?

A horizontal merger is when two or more competing companies in the same industry combine into one company.

Why do companies conduct horizontal mergers?

A major reason companies decide to conduct horizontal mergers is to eliminate competition. Companies that horizontally merge instantly eliminate any competition with the companies they merge with. This in turn increases their market share.

Other benefits of horizontal mergers include increased diversification, economies of scale, and economies of scope. Companies that horizontally merge enjoy the resources and knowledge of each company they merge with. It gives the companies access to more capital and suppliers.

Companies can also horizontally merge with companies in other locations to gain access to each other’s customers.

What is an example of a real-life horizontal merger?

A key example of a recent horizontal merger is Facebook Inc.’s mergers with Instagram, Messenger, and WhatsApp.

These four companies were in the same industry and competed with each other on some level. The mergers turned the four highly successful apps into one social media conglomerate, skyrocketing Facebook Inc.’s market share. Its acquisition of WhatsApp was the company’s largest ever.

What are some cons of horizontal mergers?

While merging two competing companies has its benefits, there are also plenty of disadvantages. First, merging two large companies can create a monopoly that raises overall prices. Creating a monopoly can come with legal repercussions, especially in the US.

There are also cultural and logistical problems that come with mergers of any type. Companies have different cultures, management styles, and values. When two different companies merge, there can be obvious disagreements and different points of view. Location differences can also create logistical problems for employees.

What’s the difference between a horizontal merger and a vertical merger?

A horizontal merger is when companies selling similar products combine into one. A vertical merger, also known as vertical integration, is when companies in different stages of the production process combine into one.

Horizontal mergers are typically conducted to decrease competition and increase market share. Vertical mergers are typically conducted to cut costs and increase efficiency.

To better understand the differences between the two, consider the following example. Car Dealer A and Car Dealer B are two competing companies selling cars directly to consumers. A company called Car Factory A manufactures cars for Car Dealer A, and a company called Car Factory B manufactures cars for Car Dealer B.

If Car Dealer A and Car Dealer B merged to decrease market competition, this would be considered a horizontal merger. 

If Car Dealer A decided to merge with Car Factory A to improve efficiency, this would be considered a vertical merger.

To summarize, a horizontal merger occurs when companies selling similar products in the same industry combine into one company. An example of this is Facebook’s acquisition of Instagram, WhatsApp, and Messenger. Horizontal mergers create several benefits including decreased competition, increased market share, and enhanced customer access.

Disadvantages of horizontal mergers include legal repercussions, clashing cultures, and logistical problems. While horizontal mergers combine companies selling similar products, vertical mergers combine companies at different stages in the production process to increase efficiency and decrease costs.