What is a Horizontal Merger?
Definition: A horizontal merger is the combining of two companies in the same industry to increase efficiencies and marketshare.
If you follow business news, chances are that you have heard of two companies coming together to form one entity so that they can operate more efficiently. If the two companies happen to be competitors in the same industry, then the process of joining forces is known as a horizontal merger.
Reasons for Horizontal Mergers?
Multiple factors might fuel the consolidation of two firms competing in the same industry. These types of mergers are usually quite intentional and the result of market analysis. So when two companies merge, perpetual profitability is usually their pursuit.
A horizontal merger might be heavily influenced by the need to control a larger market share in a market where multiple parts are competing in the same market. Businesses are usually interested in having a larger market share so that they can have a significant degree of control over factors such as price. Having a larger market share also means more potential profits.
Economies of scale
Two companies operating in the same industries might decide to consolidate to form one company with each bringing their own capabilities especially as far as production is concerned. Merging allows the two firms to combine their operations, thus producing more as a single entity and subsequently enjoying economies of scale by reducing decreasing their marginal costs.
Competitive position
Sometimes companies operating in the same industry may decide to merge so that they can compete more effectively. This happens often especially in an industry where there are smaller, less influential firms competing with larger or more powerful industry players. The smaller firms may decide to merge so that they can compete more effectively with the bigger firms.
Diversification and efficiency
Picture a scenario where two companies compete in the same industry but they both produce different products that complement each other. For example, a company that makes roofing sheets or roofing tiles may decide to merge with a company that makes gutters for collecting rainwater. Diversification allows the single entity resulting from the merger to provide a wider range of products, thus allowing it to appeal more to customers. This would allow them to enjoy manufacturing efficiencies especially if the production is merged into one location and also efficiencies in sales and advertising.
Access to resources and skills
Two companies may decide to merge if the merger will allow the single resulting entity to benefit from more access to resources and skills. For example, company A may have resources that company B does not have while company B may have employees that are highly skilled in critical components of the business. Coming together would allow the resources and skills to be pooled so the merger would have maximum benefits.
Horizontal Merger Examples
Sprint and T-Mobile
U.S telecommunications giants Sprint and T-Mobile have for the better part of 2019 been pushing towards a merger that will help them compete more effectively with Verizon and AT&T. The latter two are currently the leaders in the country’s mobile telecommunications industry while the former two have been trying to keep up with the competition. The merger plans were approved by the Federal Communications Commission. Sprint and T-Mobile secured the green light for the merger in November 2019, just two months after receiving clearance from antitrust regulators.
Glaxo Welcome and Smith Kline Beecham
This is one of the most high-profile mergers of all time. Both Glaxo Wellcome and Smith Kline Beecham merged in 2000 to form the industry titan that we now know as Glaxo Smith Kline. The merger reportedly cost $89.3 billion.
Exxon and Mobil
Exxon and Mobil successfully merged in the late 1990s to survive the tough times back then when oil prices were considerably low and energy companies were under a lot of pressure. The two companies formed the energy company that is now known as Exxon Mobil and it looks like it worked since the firm is still operational to this day.