Horizontal Acquisition

Horizontal Acquisition

Investopedia / Jessica Olah

What Is a Horizontal Acquisition?

A horizontal acquisition is when one company acquires another company in the same industry and works at the same production stage. The new combined entity may be in a better competitive position due to increased market share or scalability than the standalone companies combined to form it.

During a horizontal acquisition, a company can expand its production of products, but it doesn't mean a pivot for the company. Horizontal acquisitions expand the capacity of the acquirer, but the basic business operations remain the same, unlike an acquisition that creates a wholly different company.

Key Takeaways

  • When one company takes over or acquires a similar company in the same industry, it is called a horizontal acquisition.
  • When a company purchases a similar company, its basic business operations do not usually change but expand.
  • During a horizontal acquisition, the two companies often produce similar products and have similar production schedules.
  • An example of a horizontal acquisition would be a candy company that purchasing another candy company with different products but a similar production schedule.
  • The key difference between a horizontal acquisition and a virtual acquisition is that in the latter, the companies would be in the same industry but would have completely different production cycles.

Understanding Horizontal Acquisitions

The companies involved in a horizontal acquisition generally produce the same goods or services and produce them at the same point in the production cycle. This is so the new entity can experience more production capacity and take advantage of an increased market share. If the companies were at different stages of the production cycle, the equipment may not overlap and be as valuable to the acquiring entity.

And integrating two like companies in a horizontal acquisition can be challenging if the company cultures are vastly different. There are different types of acquisitions, some of which focus on obtaining equipment or control of operations at another point in the production cycle.

After a horizontal acquisition, a company will gain access to a wider customer base.

In a vertical acquisition, the two companies would be in the same industry, like food production or energy, but at different stages of the production cycle. This allows the acquiring company to obtain equipment that is either further upstream from the end client (backward vertical integration) or further downstream towards the end client (forward vertical integration). This gives the acquiring company more control over the production.

Horizontal integrations allow the purchasing company to reduce competition by acquiring it, diversify product offerings, creating new products, grow in size, and tap into new markets.

Example of a Horizontal Acquisition

For example, an energy producer purchases a rival that also produces energy. This is a horizontal acquisition because it is within the same industry and production schedule.

Next, the same energy producer purchases a company that manages and maintains city power grids. This is an example of a forward vertical integration because the energy producer has purchased a company responsible for bringing its product closer to the end consumer.

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