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What is 'Horizontal Integration'

Horizontal integration is the acquisition of additional business activities that are at the same level of the value chain in similar or different industries. This can be achieved by internal expansion through a reinvestment of operating profits or by external expansion through a merger or acquisition (M&A). Since the different firms integrating are involved in the same stage of production, horizontal integration allows them to share resources at that level.

BREAKING DOWN 'Horizontal Integration'

Horizontal integration, also known as lateral integration, describes the merging of two or more companies at the same point in the production process in the same or different industries. If the products offered by the companies are the same or similar, it is a merger of competitors. If all of the producers of a particular good or service in a given market were to merge, it would result in the creation of a monopoly. If enough companies conducted a horizontal integration so that only a few competitors remained, it would be considered an oligopoly.

Advantages and Disadvantages of Horizontal Integration

Examples of horizontal integration include an oil company's acquisition of additional oil refineries or an automobile manufacturer's acquisition of a light truck manufacturer. Horizontal integration offers several advantages, including favorable economies of scale, economies or scope, increased market power and reduction in the costs associated with international trade by operating in foreign markets. Horizontal integration is in contrast to vertical integration, where firms expand into different activities, known as upstream or downstream activities.

However, horizontal integrations can have adverse effects. For example, often times an M&A transaction does not yield the synergy and added value that was expected. This can destroy the overall value of the combined entity in a horizontal integration. The M&As, in the examples above, may also result in monopolies or oligopolies, both of which are illegal in the United States. Further, the combined entities in a horizontal integration usually reduce overall flexibility, making it harder to manage the resulting organization.

Real World Example of Horizontal Integration

There have been many public horizontal integrations. For example, the acquisition of Porsche SE by Volkswagon AG, fully completed in 2012, was a horizontal integration. Volkswagon, as of April 2012, owned 49.9% of the Porsche car company, and agreed to purchase the remaining 50.1% in July of 2012. The deal was for a total amount of $5.6 billion, or 4.46 billion euros.

The cash deal was based on Porsche's equity value of 3.88 billion euros and additional value equal to its expected dividend payments and the forecasted synergies of the horizontal integration. Since the two companies had similar products, it was considered a merger of competitors.

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