CORPORATE FINANCE & ACCOUNTING

MERGERS & ACQUISITIONS

Horizontal Integration
By
WILL KENTON
|
Reviewed by
JULIUS MANSA
|
Updated May 4, 2021

What is Horizontal Integration

Horizontal integration is the acquisition of a business operating at the same level of the
value chain in the same industry. This is in contrast to vertical integration, where firms
expand into upstream or downstream activities, which are at different stages of production.

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BREAKING DOWN Horizontal Integration

Horizontal integration is a competitive strategy that can create economies of scale, increase
market power over distributors and suppliers, increase product differentiation and help
businesses expand their market or enter new markets. By merging two businesses, they may
be able to produce more revenue than they would have been able to do independently.
However, when horizontal mergers succeed, it is often at the expense of consumers,
especially if they reduce competition. If horizontal mergers within the same industry
concentrate market share among a small number of companies, it creates an oligopoly. If
one company ends up with a dominant market share, it has a monopoly. This is why
horizontal mergers are heavily scrutinized under antitrust laws.

Advantages of Horizontal Integration

Companies engage in horizontal integration to benefit from synergies. There may be
economies of scale or cost synergies in marketing, research and development (R&D),
production and distribution. Or there may be economies of scope, which make the
simultaneous manufacturing of different products more cost-effective than manufacturing
them on their own. Procter & Gamble’s 2005 acquisition of Gillette is a good example of a
horizontal merger which realized economies of scope. [1] Because both companies produced
hundreds of hygiene-related products from razors to toothpaste, the merger reduced the
marketing and product development costs per product.

Synergies can also be realized by combining products or markets. Horizontal integration is

often driven by marketing imperatives. Diversifying product offerings may provide cross-
selling opportunities and increase each business’ market. A retail business that sells clothes
may decide to also offer accessories, or might merge with a similar business in another
country to gain a foothold there and avoid having to build a distribution network from
scratch.

Reducing Competition
The real motive behind a lot of horizontal mergers is that companies want to reduce
“horizontal” competition in the form of competition from substitutes, competition from
potential new entrants and the competition from established rivals. These are three of the
five competitive forces that shape every industry and which are identified in Porter’s Five
Forces model. The other two forces, the power of suppliers and customers, drive vertical
integration.

Disadvantages of Horizontal Integration

Like any merger, horizontal integration does not always yield the synergies and added value
that was expected. It can even result in negative synergies which reduce the overall value of
the business, if the larger firm becomes too unwieldy and inflexible to manage, or if the
merged firms experience problems caused by vastly different leadership styles and company
cultures. And if a merger threatens competitors, it could attract the attention of the Federal
Trade Commission.

Examples of Horizontal Integration

Examples of horizontal integration in recent years include Marriott's 2016 acquisition of
Sheraton (hotels) Anheuser-Busch InBev's 2016 acquisition of SABMiller (brewers),
AstraZeneca's 2015 acquisition of ZS Pharma (biotech), Volkswagen’s 2012 acquisition of
Porsche (automobiles), Facebook's 2012 acquisition of Instagram (social media), Disney's
2006 acquisition of Pixar (entertainment media) and Mittal Steel’s 2006 acquisition of Arcelor
(steel). [2] [3] [4] [5] [6] [7] [8] 

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ARTICLE SOURCES

Related Terms
Megamerger
A megamerger is the joining of two large corporations, typically in a transaction worth billions of
dollars, into one new legal entity.
more

What Is a Congeneric Merger

A congeneric merger is where the acquiring company and the target company do not offer the same
products but are in a related industry or market.
more

Vertical Integration
Vertical integration is a strategy where a firm acquires business operations within the same
production vertical, which can be forward or backward in nature.
more

Learn How Mergers Happen and Why

A merger is an agreement that unites two existing companies into one new company. There are
several types of, and reasons for, mergers.
more

Horizontal Acquisition
A horizontal acquisition is when one company acquires another company in the same industry or
production stage. more

The Celler-Kefauver Act Definition

The Celler-Kefauver Act was a law passed by the U.S. Congress in 1950 to prevent anti-competitive
mergers and acquisitions (M&A).
more

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