Loading the player...

What is 'Horizontal Integration'

Horizontal integration is the acquisition of additional business activities that are at the same level of the value chain in similar or different industries. This can be achieved by internal expansion through a reinvestment of operating profits or by external expansion through a merger or acquisition (M&A). Since the different firms integrating are involved in the same stage of production, horizontal integration allows them to share resources at that level.

BREAKING DOWN 'Horizontal Integration'

Horizontal integration, also known as lateral integration, describes the merging of two or more companies at the same point in the production process in the same or different industries. If the products offered by the companies are the same or similar, it is a merger of competitors. If all of the producers of a particular good or service in a given market were to merge, it would result in the creation of a monopoly. If enough companies conducted a horizontal integration so that only a few competitors remained, it would be considered an oligopoly.

Advantages and Disadvantages of Horizontal Integration

Examples of horizontal integration include an oil company's acquisition of additional oil refineries or an automobile manufacturer's acquisition of a light truck manufacturer. Horizontal integration offers several advantages, including favorable economies of scale, economies or scope, increased market power and reduction in the costs associated with international trade by operating in foreign markets. Horizontal integration is in contrast to vertical integration, where firms expand into different activities, known as upstream or downstream activities.

However, horizontal integrations can have adverse effects. For example, often times an M&A transaction does not yield the synergy and added value that was expected. This can destroy the overall value of the combined entity in a horizontal integration. The M&As, in the examples above, may also result in monopolies or oligopolies, both of which are illegal in the United States. Further, the combined entities in a horizontal integration usually reduce overall flexibility, making it harder to manage the resulting organization.

Real World Example of Horizontal Integration

There have been many public horizontal integrations. For example, the acquisition of Porsche SE by Volkswagon AG, fully completed in 2012, was a horizontal integration. Volkswagon, as of April 2012, owned 49.9% of the Porsche car company, and agreed to purchase the remaining 50.1% in July of 2012. The deal was for a total amount of $5.6 billion, or 4.46 billion euros.

The cash deal was based on Porsche's equity value of 3.88 billion euros and additional value equal to its expected dividend payments and the forecasted synergies of the horizontal integration. Since the two companies had similar products, it was considered a merger of competitors.

RELATED TERMS
  1. Horizontal Acquisition

    A horizontal acquisition is when one company acquires another ...
  2. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  3. Horizontal Market

    A horizontal market is diversified so that the products created ...
  4. Horizontal Skew

    The difference in implied volatility (IV) across options with ...
  5. Vertical Well

    A well that is not turned horizontally at depth, and which allows ...
  6. Fibonacci Channel

    A variation of the Fibonacci retracement pattern in which the ...
Related Articles
  1. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  2. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  3. Personal Finance

    Common Interview Questions for Data Integrity Analysts

    Prepare for a data integrity analyst job interview by identifying some of the key questions commonly asked and developing winning responses.
  4. Trading

    Trade This High Probability Bollinger Band Pattern (INTC, YHOO)

    Bollinger Band box patterns set up profitable opportunities when trends give way to well organized trading ranges.
  5. Insights

    Varco Perfects New Manufacturing Methods (NOV)

    National Oilwell Varco showed off a new manufacturing method by creating a plastic tube that stretches nearly 5 miles, to be used in shale fracking.
  6. Investing

    EUR/USD Consolidates After a Steep Decline

    EUR/USD consolidated at support after making a notable technical break.
  7. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
RELATED FAQS
  1. What business structures expose entrepreneurs to unlimited liability?

    Understand the advantages and disadvantages of a horizontal integration. Learn when a company would want to integrate horizontally. Read Answer >>
  2. How are direct costs allocated differently than indirect costs?

    Learn about some great examples of horizontal integration. Understand what constitutes a horizontal integration and why companies ... Read Answer >>
  3. What is the difference between horizontal integration and vertical integration?

    Horizontal integration refers to acquiring a company in the same industry; vertical integration refers to a company acquisition ... Read Answer >>
  4. What are the legal barriers to vertical integration?

    Learn how embarking on a vertical integration through a merger is liable to run into legal barriers if the integration is ... Read Answer >>
  5. When is outsourcing preferable to vertical integration?

    Deciding between outsourcing and vertical integration can be challenging. Understand the benefits of each to make the most ... Read Answer >>
  6. What are the most famous instances of backward integration?

    Learn more about backward integration in the supply chain and see how two famous examples, Carnegie Steel and Apple, used ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center