Reviewed by Aug 27, 2020| Updated on
Introduction to Horizontal Merger
A horizontal merger refers to a business consolidation that occurs between entities that operate in the same industry. Competition is usually higher among corporates operating in the same space. It means that the synergies and potential gains in market share are much more significant for entities merging.
How does Horizontal Merger work?
A horizontal merger often occurs because of more prominent companies trying to build more efficient economies of scale. On the other hand, a vertical merger happens when entities from different aspects or levels of the supply chain combine to make production and distribution more cost-effective and efficient.
It can support a company with competitive advantages. For instance, if one company sells similar products as another, the consolidated sales of a horizontal merger will increase the market of the new company.
If one company produces goods complementary to the other, the merged company may provide an extensive range of products to customers. The combined company can benefit from the diversity in its offerings. It also enters new markets if it merges with a company offering a wide range of products to different sectors of the marketplace.
Points to consider:
- A horizontal merger of two entities already doing well in the industry can be a better approach instead of starting to invest in time and resources for building a new commodity by oneself.
- A horizontal merger may increase a company’s earnings through a new range of products to existing customers.
- A company can strengthen its distribution activities across India through mergers.
- Horizontal mergers are effective in reducing competition in a particular industry or marketplace.
- There are pricing advantages by keeping control of over-pricing.
Comparison between Horizontal and Vertical Mergers
The main goal of a vertical merger is to promote a company’s efficiency or reducing costs. A vertical merger happens when two corporates that were previously selling to or buying from each other merge as one entity. The businesses are usually at different stages of production. For instance, a manufacturer might merge with a wholesaler selling its products. When corporates begin combining in a vertical merger, competitors will find it difficult to obtain essential supplies. It increases their limitations to entry and ultimately reduces their profits.
Whereas, horizontal mergers allow companies to merge while they are in the same level of the supply chain, thereby increasing customer base and variety of product offerings.