The merger between these two oil giants helped the firm diversify its portfolio, with each company having a foothold in different parts of the world. The horizontal integration used by Exxon enabled it to gain access to Mobil’s gas stations and its product reserves. ExxonMobil, therefore, became one of the biggest oil companies in the world due to its increased efficiency in operations, pooling of resources, and streamlining of procedures. There are so many merger and acquisition transactions that have occurred between companies in various industries. Once a company acquires or merges with another company and both of them are at the same point of the supply chain in a very similar industry, it is most likely an example of horizontal integration.
Regulatory Flexibility
Horizontal integration is not illegal, but the competition commission has the power to prevent deals from going through if it deems the deal would create a monopoly, or significant market power. Two of the biggest oil and gas companies – Exxon and Mobil – merged in 1998, in a deal worth over $75 billion. The resulting company, ExxonMobil, is now the third largest company in the world and revenues of over $280 billion. A strategic change may involve twice as many bureaucratic layers and significant levels of red tape to overcome.
- As a result, horizontal mergers are most common among companies in a mature cycle stage, increasing market share and efficiency.
- In a leveraged buyout, a company is acquired using a significant amount of borrowed money, with the assets of the acquired company often used as collateral.
- To strengthen their market presence and competitive positions, companies will execute one of three horizontal integration transactions–mergers, acquisitions, or internal expansion.
- Mergers that result in increased market concentration may face resistance from regulatory authorities aiming to preserve competition and protect consumer interests.
- Eliminating direct competitors through horizontal integration significantly reduces market competition.
- The merger helped the firm diversify its portfolio, with each company having a foothold in different parts of the world.
Demerits Of Horizontal Integration Strategy
Businesses often consider this approach to increase market share, reduce expenses, and improve efficiency. By implementing horizontal integration, companies can access new markets, streamline business operations, and increase revenue potential through expanded product lines and distribution channels. Horizontal integration is a merger between two companies operating in the same industry.
The Heinz brand provides a compelling case study, as its joint venture with Kraft Foods not only marked a significant business move but also signaled a transformative push towards digital optimization and product innovation. The union of Procter & Gamble (P&G) and Gillette in 2005 is a compelling narrative of how horizontal integration can shape market realities. The $57 billion transaction stands as P&G’s largest acquisition, highlighting how strategic mergers lead to a radical transformation in competitive dynamics. This melding of giants brought together two leading names in personal care, creating a conglomerate with a staggering array of household brands. Cultural integration poses another significant risk during horizontal integration.
Horizontal integration is a competitive strategy where business entities operating at the value chain level and within the same industry combined to gain synergies. A hostile takeover is a type of acquisition where the target company does not agree to the acquisition. The acquiring company bypasses the target company’s management and makes a direct offer to its shareholders. This type of horizontal integration is often used when the target company is seen as a valuable asset, and the acquiring company believes it can run the target company more efficiently.
Product Differentiation
For instance, a merger between Nike and Adidas would be an example of horizontal integration. Vertical Integration, on the other hand, involves the integration of companies that operate at different stages of the production or examples of horizontal integration distribution process within the same industry. This strategy allows companies to control more stages of the supply chain, from raw materials to the final product or service delivery.
- Substantial goodwill reflected anticipated synergies from combining CVS’s pharmacy network with Aetna’s insurance capabilities.
- In contrast to horizontal integration, vertical integration refers to a merger between companies at different levels of the value chain, e.g. upstream or downstream activities.
- Such horizontal mergers or acquisitions reduce competition from new potential rivals or from already established rivals that wish to acquire the company.
Horizontal Integration: Definition, Synergies, Examples
The acquisition did not involve a merge of names, but did involve Walt Disney Studios as a subsidiary and The Walt Disney Company as owner. She owns her own content marketing agency, Wordsmyth Creative Content Marketing, and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent. Successful horizontal integration of an acquired company requires meticulous planning and execution, from ensuring cultural compatibility to conducting extensive due diligence and aligning strategic objectives. Vertical integration is effective for companies looking to control more of their supply chain, improve quality control, and reduce dependencies on external vendors. By combining resources, Marriott improved its quality control and operational efficiencies, leading to more control over the value chain and enhanced customer satisfaction.
This approach aims to consolidate market power, reduce competition, achieve economies of scale, and expand the company’s reach and product offerings. Key Differences between horizontal and vertical integration lie in their focus on market consolidation and supply chain control, respectively. Horizontal integration seeks to expand market share and reduce competition among similar businesses, leveraging economies of scale and synergies within the same industry segment. In contrast, vertical integration aims to streamline operations, enhance control over production processes, and capture more value along the supply chain by integrating upstream or downstream activities. One vital takeaway for businesses is the significance of market trends that back the logic of their expansion.
This acquisition had strengthened the market position of Sun pharma is every aspect such as there was an increase in its net sales, gross profit, net profit, etc. Similarly, the fixed assets got doubles and there was an increase in cash balances too. Through this deal, Red Hat supported IBM to enlarge its customer base of organizations that are still away from cloud computing. In 2011, the well-known horizontal merger of Hewlett-Packard and Compaq took place. The structure of this merger was stock-to-stock including exchange ratio i.e. 0.63 of HP share on every Compaq share. Different companies or organizations look for growth opportunities by adopting integration strategy i.e. vertical or horizontal integration with other organizations or companies.
Customer Base
As part of horizontal integration, two companies join together and create an even bigger one – the market share of each is combined. A company that now has a 30 percent market share instead of 15 percent has a greater influence. In August 2018, Vodafone India and Idea Cellular merged to create the largest telecommunications firm in India – owning around 35 percent of the market. Both firms were selling telecommunication services such as mobile, phone, and internet providing’s – making it a clear example of horizontal integration. The future of horizontal integration also points towards an emphasis on digital capabilities, as companies seek to acquire competencies in AI, big data, and the Internet of Things (IoT).
Horizontal integration is used by horizontally integrated companies to create economies of scale and cross-sell to each other’s customers. Hence, using this strategy, means competitors in the same market are combining their assets and operations which can cause the creation of a monopoly or oligopoly. When you consider merging lanes with another business, red flags raised by antitrust laws can’t be ignored. Horizontal integration has the potential to trigger alarms over unfair market control, posing risks such as creating a monopoly that dominates a market.
The company from Europe is receiving a high number of projects for UAE, but in order to develop them, they need more financial and human resources. This could range from duplicating work to financial over-spend to a decline in efficiency due to a lack of competition. When two big companies become one huge international one, the efficiencies are not so straight forward. As we saw with the merger of Exxon and Mobil – they both operated in different markets.
These types of takeovers are generally known as hostile takeovers that are without permission. A horizontal merger happens once two companies combined that operate and compete in a similar or same type of business activity. In other words, when a company either purchases the competitor company or both agree to join to make a new combined organization; then it is called a merger.