VC GLOSSARY

Horizontal integration refers to when a company seeks to acquire one or more companies and assets within the same industry. 

It often takes the form of a merger, with one company being absorbed by the other or an entirely new company being formed. In both of these instances, 2 stocks become 1. The companies involved can also remain as separate entities, operating and trading independently of one another.

There are several reasons a company may decide to pursue horizontal integration.

If, for instance, a company wishes to enter a new market overseas, it may choose to acquire an existing company in its target market. This process may help save the company time and money, at least when compared to building a new company from the ground up.

Horizontal integration may also help eliminate potential competitors, in turn helping a business grow more rapidly. Thanks to the economies of scale principle, continued horizontal integration could help a company increase its market share and decrease its costs.

Some well-known examples of horizontal integration include:

• Walt Disney Company acquiring Pixar Animation Studios
• Marriott’s merger with Starwood
• Facebook acquiring WhatsApp

Companies seeking to achieve horizontal integration should understand the impact that doing so may have on their shareholders. While it’s impossible to know the precise outcome of each merger, there are several potential advantages and disadvantages for shareholders to keep in mind. 

• Increased market share.
• Increased stock value of the company being acquired.
• Decreased risk for the company overall, which could make it appear to be a more sound investment.
• Higher dividends for stockholders in the long term.

• Diluted voting power.
• Decreased value in the acquiring company’s stock.
• Limited company flexibility.

As an investor, horizontal integration can have a huge impact on your investment strategy and portfolio. For example, the company being acquired usually experiences a sharp rise in stock price. But if the merger ends up falling through, its stock price is very likely to plummet. This often leaves the company’s stock price much lower than it was before the potential merger. Needless to say, this is particularly unfortunate news if you purchased it during its rise.

If you are a majority stockholder in a company involved in a merger, you may benefit from increased stock value and higher dividends. However, the addition of more shares to the voting pool decreases your voting power.

Leadership changes are also a very common part of mergers. A dilution in voting power may leave you with less of a say in critical management changes.

Horizontal integration can also impact the market as a whole.

The mere rumor of a potential merger can trigger a flurry of buying and selling activity. The bigger the companies involved, the more likely market values will shift dramatically. Horizontal integration can also decrease the opportunity for newer companies to establish themselves and experience growth.

Another effect horizontal integration can have on the market is that it can lead to the formation of oligopolies. This can be devastating to investors who have invested in smaller competitors of the merged companies. Moreover, if one of the companies involved in an oligopoly goes under, this could have a far-reaching impact on both the sector and the market as a whole.

Many companies pursue horizontal integration in the hopes of reaping the potential benefits associated with this strategy. With numerous case studies showcasing the benefits of horizontal integration, it’s often tempting to think of it as a foolproof way to increase market share, decrease costs, and enter new markets. However, it’s important to keep in mind that it still has its drawbacks and that success is far from guaranteed.

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