Undergoing horizontal integration can be very beneficial for two companies. Typically, this happens when two companies competing in the same industry at the same stage of production decide to unify. But before considering it, businesses should weigh the pros and cons of the strategy and how becoming one large organization would play out for their bottom line.
When it is done correctly, there are many advantages to horizontal integration. These include (but are not limited to) an increase of market power or market share, reduced competition, and increases in other synergies.
But as with anything else, there are also downsides. Among them are antitrust issues and legalities, a reduction in flexibility, and destroying value rather than creating it.
- Undergoing horizontal integration can benefit companies and typically takes place when they are competing in the same industry.
- The advantages include increasing market share, reducing competition, and creating economies of scale.
- Disadvantages include regulatory scrutiny, less flexibility, and the potential to destroy value rather than create it.
Benefits of Horizontal Integration
There are numerous benefits to undergoing horizontal integration.
Larger Market Share
The most obvious benefit is an increased market share or market power. When the two companies merge, they also combine the product base, technology, and services that are available on the market. With more products under one name, the new company can increase its foothold among consumers.
Bigger Base of Customers
Because the two companies may be operating in the same industry, they may not necessarily have the same consumer base. By merging the two companies into one, the new organization now has access to a larger base of customers.
By increasing its customer base, the new company can now boost its revenue. It's typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.
Here are a few other advantages of horizontal integration:
- Reducing competition
- Increasing other synergies such as marketing
- Creating economies of scale and economies of scope
- Reducing other production costs
Horizontal integration should not be confused with lateral integration, which is the merger of two companies that sell related goods but do not compete with each other.
Drawbacks of Horizontal Integration
As with any process, some disadvantages must be considered along with the benefits.
The first and most troublesome is the level of scrutiny this kind of strategy faces, especially from government agencies. Big mergers like these are the reason why antitrust laws are in place. These laws prevent big corporations from mergers and acquisitions that would narrow the competitive market and possibly create a monopoly. This is seen as being a predatory act, giving one player dominance in the market. It creates the idea that the larger, newly formed corporation may take advantage of consumers with higher prices and narrow product/service choices.
Other cons of horizontal integration include:
- Stunting economic growth of the new enterprise.
- Reduced flexibility: This happens because the company is now a larger organization. The addition of more personnel and processes means the need for more transparency and, therefore, more accountability and red tape.
- Destroying value rather than creating it: This happens because the synergies never materialize despite the costs of the horizontal integration.
Real World Examples
As mentioned above, horizontal integration takes place when two companies that compete in the same industry at the same stage of production merge. One such example is Disney's acquisition of Pixar in 2006. Disney was facing stagnation in the market and was rejuvenated after the purchase of Pixar. The two companies were operating in the same space (animation) and were able to merge their technology, thereby increasing market share and profitability.
The merger of Exxon and Mobil is another great example of horizontal integration. As individual entities, the two were similar in size and operation and joined together to form a stronger company in 1998.
The Bottom Line
Horizontal integration can be a smart strategic choice for companies. If analyzed and executed properly, it can lead to increased market share, increased efficiency, reduction in costs, and economies of scale. When undergoing a horizontal integration, however, it is important to look out for the disadvantages, such as increased regulatory scrutiny, failure to combine synergies, and destroying value, which would make the entire process worthless and costly.