Horizontal integration is the merger of two or more companies in the same part of the production supply chain. They may be in the same or different industries. The process is also known as lateral integration and is the opposite of vertical integration which allows companies to merge at different stages in production.
Here are three textbook examples of horizontal integration made by companies looking to strengthen their positions in the current market and enhance their current production and/or distribution stage.
Facebook and Instagram
One of the clearest examples of horizontal integration is 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, looking to strengthen its position in the social sharing space, saw the acquisition of Instagram as an opportunity to grow its market share, reduce competition and gain access to new audiences. All of these things came to pass, resulting in a high level of synergy.
Although Instagram is now owned by Facebook, it still operates independently (as well as along with Facebook) as its own social media platform.
Another key example of a horizontal integration was Walt Disney Company's $7.4 billion acquisition of Pixar Animation Studios in 2006.
Disney started out as an animation studio that targeted families and children. But it was facing market saturation with its current operations, along with a sense of creative stagnation.
Pixar operated in the same animation space as Disney, but its (digitally) animated movies were made with more cutting-edge technology and an innovative vision. A decade later, the deal was widely seen to have reanimated Disney, not to mention expanding its market share and increasing profits.
Finally, there is the 1998 merger of two major oil companies, Exxon and Mobil – the biggest in corporate history at the time. The integration combined the first and second largest energy corporations in the U.S.
Officially, Exxon bought Mobil for $73.7 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 and the 13th largest by revenue. Shareholders have quadrupled their money.
Why is Horizontal Integration Important?
When implemented correctly, horizontal integration can increase the market share and power of two companies. The companies can merge synergies, product lines and reach a wider audience.
The process of horizontal integration also reduces the level of competition in the market while boosting the revenue two companies may not have been able to make if they were on their own. The parties involved in the integration are also able to reduce and share expenses.
These types of mergers are heavily scrutinized because they can often end up resulting in a monopoly, where one company has the dominant share in the market.
The Bottom Line
Although it can lead to scrutiny, the process of horizontal integration has many benefits in the marketplace. Companies can reach a wider base while cutting down on their competition. Costs can be reduced while increasing revenue. The examples above merely show how powerful a horizontal integration can be when similar companies merge.