A horizontal acquisition occurs when one company acquires another within the same industry and at the same production stage. The new entity is often better positioned due to increased market share and scalability, compared to the standalone companies that merged. While horizontal acquisitions expand the capacity of the acquirer, basic business operations remain the same, unlike acquisitions that form a wholly different company.
Key Takeaways
- A horizontal acquisition happens when one company acquires a similar company within the same industry.
- Basic operations expand rather than change after a horizontal acquisition.
- Both companies often produce similar products and share production schedules.
- Vertical acquisitions, in contrast, involve companies in different stages of the same industry’s production cycle.
Insights into Horizontal Acquisitions
Mergers and acquisitions (M&A) form a central part of the modern business landscape, combining businesses and assets into singular entities. Mergers involve the consolidation of companies, while acquisitions happen when one company purchases another.
A horizontal acquisition, also known as horizontal integration, involves a transaction between two companies within the same industry. Some motivating factors behind horizontal acquisitions include:
- Reducing competition
- Diversifying product offerings
- Creating innovative products
- Expanding business operations
- Entering new markets
- Gaining significant market share
In these acquisitions, both the acquirer and target firm typically produce the same goods or services at the same production stage. This enables the new entity to enjoy enhanced production capacity and increased revenue. If the companies were at different production stages, the equipment might not be as complementary.
Once a horizontal acquisition is finalized, the target firm’s identity often dissolves, becoming part of the acquirer. Public shares of the target firm are also absorbed, allowing shareholders to receive cash or stock from the acquiring company. Despite these changes, business operations largely remain unchanged.
Advantages and Disadvantages of Horizontal Acquisitions
While horizontal acquisitions can be highly beneficial, they come with their own intrinsic drawbacks. Here’s a general overview:
Advantages
A successful horizontal acquisition can provide numerous benefits, such as:
- Increased market share and customer base
- Access to new markets and product lines
- Reduction in competition and production costs
- Adoption of a recognized brand name
- Boost in both revenue and profits
Disadvantages
Despite merits, integration faces challenges. Regulatory scrutiny often arises to prevent reduced competition and establishment of monopolies, potentially harming consumers by limiting their options. Integrating company cultures, processes, and procedures can be arduous. Employees may require extensive training to adapt, adding to costs and challenges. Additionally, a bigger, merged company may lose flexibility, struggling to react swiftly to market changes compared to smaller entities.
Pros
- Increased market share and customer base
- Access to new markets and product lines
- Elimination of competition and reduction in production costs
- Adoption of successful brands
- Boost in revenue and profits
Cons
- Increased regulatory scrutiny
- Integration challenges
- Reduced flexibility
Horizontal Acquisition vs. Vertical Acquisition
Acquisitions vary, some focus on control over production equipment or other operational aspects. Vertical acquisitions involve consolidating companies in the same industry at different stages in the production cycle. Reasons for vertical acquisitions mirror those for horizontal acquisitions, with the added advantage of gaining more control over the entire production process.
Types of Vertical Acquisitions:
- Backward Vertical Acquisition: This allows the acquiring company to acquire equipment further upstream in the production cycle.
- Forward Vertical Acquisition: This allows access to equipment that is downstream from the end client.
For example, an energy company acquiring a company managing city power grids is a backward vertical acquisition, as the producer gains closer access to end consumers.
Examples of Horizontal Acquisitions
Consider this hypothetical example of two rival energy companies operating in the same region. After some time, companies A and B negotiate a merger, where Company A acquires Company B. A horizontal acquisition like this happens within the same industry and similar production schedules.
Real-World Examples
Several horizontal acquisitions illustrate this strategy’s effectiveness:
- AT&T and Discovery: Merged in 2022 to form Warner Bros. Discovery (WBD).
- Disney and 21st Century Fox: In 2019 merged, both providing extensive entertainment and streaming services.
- Northwest Airlines and Delta: Merged in 2008 to combine their airline services.
- Exxon and Mobil: Joined hands in 1998 to form ExxonMobil, completing the transition a year later.
What Are the Benefits of a Horizontal Acquisition?
Horizontal acquisitions bring multiple advantages: eliminating competition, reducing production costs, boosting profits, growing businesses, gaining access to new markets, adopting new product lines and brands, and increasing market share.
What’s the Difference Between a Merger and an Acquisition?
Mergers and acquisitions often involve similar companies’ consolidations. A merger combines two companies—typically of similar size and operations—mutually. Acquisitions involve one company purchasing another, which can be friendly or hostile, with the latter meaning the target firm tries to resist the takeover.
How Does a Horizontal Acquisition Differ From a Vertical Acquisition?
While horizontal and vertical acquisitions happen in the same industry, their geographical operational stages differ. Horizontal acquisitions occur in the same production stage, whereas vertical acquisitions involve companies at different stages in the production process. The latter yields the acquiring company operational control over closer or farther stages relative to the end client.
The Bottom Line
Horizontal acquisitions allow companies within the same production stage to gain market share, expand product lines, and eliminate competition. However, they are subject to extensive regulatory scrutiny to prevent excessive market power that could harm consumers.
Related Terms: vertical acquisition, mergers, business consolidation, market expansion, product diversification.
References
- AT&T. “Discovery and AT&T Close WarnerMedia Transaction”.
- The Walt Disney Company. “Disney’s Acquisition of 21st Century Fox Will Bring an Unprecedented Collection of Content and Talent to Consumers Around the World”.
- Delta. “Delta and Northwest Merge, Creating Premier Global Airline”.
- ExxonMobil. “FORM 8-K: CURRENT REPORT”.
