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What is 'Horizontal Integration'

Horizontal integration is the acquisition of a business operating at the same level of the value chain in a similar or different industry. This is in contrast to vertical integration, where firms expand into upstream or downstream activities, which are at different stages of production.

BREAKING DOWN 'Horizontal Integration'

Horizontal integration is a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, increase product differentiation and help businesses expand their market or enter new markets. By merging two businesses, they may be able to produce more revenue than they would have been able to do independently.

However, when horizontal mergers succeed, it is often at the expense of consumers, especially if they reduce competition. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly. If one company ends up with a dominant market share, it has a monopoly. This is why horizontal mergers are heavily scrutinized under antitrust laws.

Advantages of Horizontal Integration

Companies engage in horizontal integration to benefit from synergies. There may be economies of scale or cost synergies in marketing, research and development (R&D), production and distribution. Or there may be economies of scope, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own. Proctor & Gamble’s 2005 acquisition of Gillette is a good example of a horizontal merger which realized economies of scope. Because both companies produced hundreds of hygiene-related products from razors to toothpaste, the merger reduced the marketing and product development costs per product.

Synergies can also be realized by combining products or markets. Horizontal integration is often driven by marketing imperatives. Diversifying product offerings may provide cross-selling opportunities and increase each business’ market. A retail business that sells clothes may decide to also offer accessories, or might merge with a similar business in another country to gain a foothold there and avoid having to build a distribution network from scratch.

Reducing Competition

The real motive behind a lot of horizontal mergers is that companies want to reduce “horizontal” competition in the form of competition from substitutes, competition from potential new entrants and the competition from established rivals. These are three of the five competitive forces that shape every industry and which are identified in Porter’s Five Forces model. The other two forces, the power of suppliers and customers, drive vertical integration.

Disadvantages of Horizontal Integration

Like any merger, horizontal integration does not always yield the synergies and added value that was expected. It can even result in negative synergies which reduce the overall value of the business, if the larger firm becomes too unwieldy and inflexible to manage, or if the merged firms experience problems caused by vastly different leadership styles and company cultures. And if a merger threatens competitors, it could attract the attention of the Federal Trade Commission.

Examples of Horizontal Integration

Examples of horizontal integration in recent years include Marriott's 2016 acquisition of Sheraton (hotels) Anheuser-Busch InBev's 2016 acquisition of SABMiller (brewers), AstraZeneca's 2015 acquisition of ZS Pharma (biotech), Volkswagen’s 2012 acquisition of Porsche (automobiles), Facebook's 2012 acquisition of Instagram (social media), Disney's 2006 acquisition of Pixar (entertainment media), and Mittal Steel’s 2006 acquisition of Arcelor (steel).

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