Horizontal integration is the merger of two or more companies that occupy similar levels in the production supply chain. However, they may be in the same or different industries. 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.
Here are three textbook examples of horizontal integration undertaken by companies that sought to strengthen their positions in the market and enhance their production or distribution stage.
- The merger of two companies at similar levels in the production supply chain is known as horizontal integration.
- The transaction allows companies to expand their market share and cut costs with synergies.
- These integrations can include companies in different industries, but they are the opposite of vertical integrations, which include companies at difference production supply stages.
Facebook and Instagram
One of the most definitive examples of horizontal integration was Facebook's acquisition of Instagram in 2012 for a reported $1 billion. Both Facebook and Instagram operated in the same industry (social media) and shared similar production stages in their photo-sharing services. Facebook sought to strengthen its position in the social sharing space and saw the acquisition of Instagram as an opportunity to grow its market share, reduce competition, and gain access to new audiences. Facebook realized all of these through its acquisition. Instagram is now owned by Facebook but still operates independently as its own social media platform.
The estimated value of Instagram as of 2018 per Bloomberg. Facebook's horizontal integration of Instagram was truly historic with a return of 100% in just over six years.
Another notable example of a horizontal integration was Walt Disney Company's $7.4 billion acquisition of Pixar Animation Studios in 2006. Disney began as an animation studio that targeted families and children. However, the entertainment giant was facing market saturation with its current operations along with creative stagnation.
Pixar operated in the same animation space as Disney, but its (digitally) animated movies used cutting-edge technology and an innovative vision. The deal is now widely considered to have literally and figuratively reanimated Disney, expanded its market share, and boosted its profits.
The 1998 merger of two major oil companies, Exxon and Mobil, was the biggest in corporate history at the time. The integration combined the first and second largest energy corporations in the United States.
Officially, Exxon bought Mobil for $75.3 billion, and the purchase enabled Exxon to gain access to Mobile's gas stations as well as its product reserves. Thanks to the pooling of resources, increased efficiency in operations, and streamlining of procedures, today, ExxonMobil is one of the biggest oil companies in the world. The Daily Records lists it as the third largest in terms of production as of 2019, while Oil&GasIQ, a platform for thought leadership to professionals in the hydrocarbons sector, cited Exxon as the fourth largest in terms of production in 2018.
Horizontal integration can allow companies to quickly expand their reach and expertise while reducing costs.
Why Horizontal Integration Is Important
When implemented correctly, horizontal integration can increase the market share and power of two companies. The companies can merge synergies, product lines, and enter new markets.
Horizontal integration also reduces the level of competition in the market while boosting the revenue of the participants who otherwise may not have prevailed in a fierce market environment independently. Through integration, the parties involved can share institutional knowledge while reducing expenses.
Mergers based on horizontal integration are subject to heavy scrutinization because they can often result in a monopoly where one company dominates the market.
The Bottom Line
The examples show that, in many cases, horizontal integration pays off as those involved can widen their reach and eliminate weaker competitors. Companies can gain institutional knowledge, expertise, and strengths that they may lack from another firm. Ultimately, integrating firms reduce their costs while increasing revenues.