This type of acquisition is usually smoother and involves less resistance, making the integration process more efficient. For example, Google’s acquisition of YouTube in 2006 was a friendly takeover that allowed Google to expand its online video services seamlessly. Horizontal integration offers many potential benefits and it also requires careful planning and execution to address challenges such as regulatory scrutiny, cultural integration, and maintaining focus on core business operations.
Horizontal Integration: Benefits and Drawbacks
A notable example of horizontal consolidation through acquisitions is Salesforce’s acquisition of Tableau. This acquisition allowed Salesforce to integrate Tableau’s powerful data visualization and analytics platform into its broader suite of cloud-based business solutions, strengthening its position in the data-driven enterprise market. Mergers bring two companies together, combining resources, expertise, and customer bases into one stronger entity. In this article, we’ll cover the key concepts of horizontal integration, real-world horizontal integration examples, and important considerations to help you decide if this strategy suits your business goals. Horizontal integrations are more likely if one sector is outside the regulator’s focus. For example, the 2023 merger of Elance and O Desk was far removed from any regulator’s scope or attention, though it created a giant in the online freelancing industry.
Horizontal Integration Vs Vertical Integration
Vertical integration, meanwhile, offers strategic advantages such as cost control, quality assurance, and differentiation but requires careful management of operational complexities and supplier relationships. Ultimately, the choice between horizontal and vertical integration depends on a company’s strategic goals, market dynamics, and capabilities to manage integration challenges effectively. Both strategies can be powerful tools for growth and competitive advantage when implemented thoughtfully and aligned with overall business objectives.
Vertical Integration Explained: How it Works (+ Examples)
Horizontal integration generally occurs when two companies in the same industry combine (although infrequently occurs in unrelated industries, but at the same stage of the supply chain). This horizontal integration between the two oil giants was driven by falling oil prices and global competitive pressures. The merger helped the firm diversify its portfolio, with each company having a foothold in different parts of the world. For instance, Exxon had experience of deepwater exploration in Western Africa – whilst Mobil had facilities present in Nigeria and Equatorial Guinea. Both Disney and Pixar are in the business of making animated movies and shows – meaning the deal was a form of horizontal integration.
Reasons for a Company to Integrate Horizontally
This can come at the cost of stricter regulations as officials look to curb its market power. Yet some are arranged on the basis of strict regulations and/or with parts of the company splitting off into independent units. Recent examples include Disney’s acquisition of 21st Century Fox, CVS Health’s merger with Aetna, and Salesforce’s purchase of Slack, which enhanced capabilities and market reach within their respective industries.
Revenue growth, cost savings from economies of scale, market share increase, and return on investment (ROI) are KPIs that help evaluate the operational and financial impact on the company during the horizontal integration process. Horizontal integration is a merger between two companies operating in the same industry. These companies are usually competitors and merge to gain higher market power and economies of scale. It is a business strategy in which entities try to grow and expand at the same industry level. Success is measured by financial metrics (revenue growth, cost savings), market impact (increased market share), operational efficiencies, innovation outcomes, and employee satisfaction. How does horizontal integration differ from vertical integration and diversification?
When HP acquired Autonomy Corporation in 2011 for $11.1 billion, HP later wrote down $8.8 billion of the acquisition value, citing significant accounting irregularities and overestimated synergies that did not materialize. By integrating with a competitor, a company can reduce the level of competition in the market. This reduction in competition can lead to greater pricing power, allowing the company to set prices more favorably and improve profit margins. Compaq was an American information technology company founded in 1982 that developed, sold, and supported computers and related products and services. Hewlett-Packard provided a wide variety of hardware components, as well as software and related services to consumers and businesses. Tata Steel (in India) was established in 1907 which was the largest steel producer.
- Such companies can take advantage of their knowledge and experience to establish themselves in different sectors and thus have wider opportunities in their portfolio of offerings.
- The acquiring company bypasses the target company’s management and makes a direct offer to its shareholders.
- This can lead to significant savings in areas such as manufacturing, procurement, and logistics.
- Antitrust laws protect consumer interests and keep markets open to competition.
Alternatively, two companies may decide to form one company and agree to a merger. This is done with the aim of capturing a number of advantages – primarily increased efficiency and lower costs of production. Horizontal integration is where a business joins with another at the same stage of the supply chain. For instance, a merger between Nike and Adidas would be an example of horizontal integration. While horizontal integration offers strategic opportunities for growth and market expansion, companies must carefully assess and mitigate these risks.
Alternatively, horizontal integration between several small players means they have the power to take on giants as well. A firm is said to possess ownership of the target firm once it purchases either all or most of the shares of that target firm. In this process, a higher price than the stock’s market value is offered by the acquiring firm to shareholders of the target firm to buy its shares. In proxy fight takeover, the acquiring firm seeks examples of horizontal integration the voting rights of shareholders of the target firm to have control over its board of directors. The final stage of the takeover includes filing an acquisition notice of 30 days with the SEC (Security & Exchange Commission) and the board of directors of the target firm. The renowned company IBM acquired Red Hat in July 2019 which is an American multinational open-source software company.
- The acquisition business was officially closed at the price of $300 million in cash and 23 million shares.
- Employees of the acquired company may resist integration efforts due to uncertainty about their roles and job security.
- These days Apple is one of the biggest companies in the world in terms of having access to various markets in the world of technology.
- In Europe, businesses like India’s Tata Motors have seen remarkable growth through cross-border mergers, utilizing European manufacturing sites to foster innovation and efficiency.
Horizontal integration is the merger of two or more companies that occupy similar levels in the production supply chain. The process is also known as lateral integration and is the opposite of vertical integration whereby companies that are at different stages in the production supply chain merge. In a nutshell, horizontal integration refers to the acquisition of a company operating at the same level of the value chain. The acquired business can belong to either a similar industry or different one. Unlike in the case of vertical integration, whereby a company either expands upstream or downstream. When two companies merge, they often create a large company with significant market power.
The deal, valued at over $13 billion, allowed Marriott to achieve cost savings through economies of scale and increased market power, giving the new company a competitive edge in the crowded hospitality market. Through the strategic merger or acquisition of two or more companies within the same industry, organizations achieve economies of scale and reduce production costs, among other advantages. Horizontal Integration is also a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, increase product differentiation and help enter new markets. Horizontal integration keeps the business within its current market, aiming to grow market share and reduce competitors. This strategy aims to optimize resources and boost revenue by expanding products or distribution channels.
Broadening Your Market Reach
This was one of the main Mexican juice companies, with the objective of expanding its beverage portfolio mainly in Latin America. Likewise, Hasbro, the second largest toy company in the market, had taken over brands such as Milton Bradley and Playskool. Using these three companies, GAP Inc. has been very successful in controlling a large segment of retailing in the textile sector. Each company has stores that sell garments designed to meet the needs of different groups.
An example is the merger of Kraft Foods and Heinz in 2015 enabled the combined company to streamline its supply chain and production processes, resulting in substantial cost savings. A hostile takeover is a type of acquisition where the target company does not agree to the acquisition. The acquiring company bypasses the target company’s management and makes a direct offer to its shareholders. This type of horizontal integration is often used when the target company is seen as a valuable asset, and the acquiring company believes it can run the target company more efficiently. An example is the acquisition of Cadbury by Kraft Foods in 2010, which was initially resisted by Cadbury’s management.
As a result, horizontal integrations become a popular means of acquiring market share. As stated above, M&A teams will seek this kind of deal if there are economies of scale, as the increased production must lead to significant cost advantages across the value chain. Businesses looking to achieve scale often begin by developing horizontal integration strategies identifying potential target companies that would enable it to grow.
An example is the leveraged buyout of Dell Technologies by Michael Dell and Silver Lake Partners in 2013. Square, now known as Block Inc., acquired Afterpay, an Australian buy-now-pay-later service, for $29 billion. This acquisition aimed to expand Square’s payment offerings and capitalize on the growing demand for flexible payment options, thereby increasing its market share in the FinTech sector. This was a £6.2 billion (US$12 billion) acquisition.After the acquisition, Mr. Ratan Tata, Chairman of Tata Steel and Corus, said that this is a major step forward in the company’s global strategy.
The relentless pace of globalization, accompanied by technological advancements, suggests that companies will increasingly seek opportunities to join forces to withstand the pressures of a competitive global market. By doing so, they stand to benefit from shared technology, expanded customer bases, and robust financial positioning. Noteworthy is the horizontal integration of companies like Kraft Foods and Heinz, which created an enormous food industry powerhouse through strategic consolidation. Companies looking to grow in size, increase revenue, expand to new product lines, and diversify operations may consider pursuing horizontal integration. Horizontal integration occurs when similar companies merge in the same stage of a supply chain merge. As opposed to a vertical integration which helps a company shift to earlier or later in the supply chain, horizontal integration further solidifies a company’s current position along a manufacturing process.