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Horizontal Acquisition



Definition

A horizontal acquisition refers to the buying or takeover of a company that operates in the same industry or at the same production stage as the acquiring entity. It is a strategy to gain a larger market share, achieve economies of scale, diversify products or services, or achieve synergistic benefits. In simple terms, it’s a type of merger where two competing companies join forces.

Phonetic

The phonetic transcription of “Horizontal Acquisition” is /ˌhɔː.rɪˈzen.tl ˌæk.wɪˈzɪʃ.ən/

Key Takeaways

  1. Broadening Market Spectrum: Horizontal Acquisition allows a business entity to increase its market presence by acquiring companies that operate under a similar line of business or industry. This way, the acquiring company can broaden its product or service portfolio, and potentially reach a larger target market.
  2. Competition Reduction: By purchasing a direct competitor, an entity undergoing a horizontal acquisition eliminates one player in the market. This can lead to increased market share, reduced competition, and potentially the ability to set higher prices for its product or service.
  3. Cost Efficiency: Horizontal acquisitions can lead to economies of scale, resulting in reduced costs. This can be achieved through the combination of overlapping departments like sales, marketing, and distribution, which can streamline operations and make them more cost effective.

Importance

Horizontal acquisition is an important concept in business and finance because it represents a strategic move by a company to increase its market share by acquiring a similar company in the same industry. This could be a direct competitor or a business operating in a similar space. The largest benefit to a horizontal acquisition is the potential for significant growth and expansion in market share instantly, without the lengthy process of organic growth. It may also lead to cost efficiencies through economies of scale, lead to synergies, reduce competition, and diversify the product or service base of the business. Additionally, it could provide opportunities for the business to expand into new geographical areas. Therefore, understanding horizontal acquisition is crucial for strategic business growth and competitiveness.

Explanation

Horizontal acquisition refers to a strategic move where a company acquires another company that is operating in the same or similar industry or at the same level of the product supply chain. This kind of merging aims to achieve various benefits like increasing the company’s size, diversifying its products or services, achieving economies of scale, reducing competition, or gaining access to new customers, new markets, or new technologies. It’s a growth strategy that businesses use to achieve their objectives faster than they possibly can do by organic growth.Primarily, horizontal acquisitions are implemented to expand a company’s market share or reach within its industry. By acquiring or merging with a direct competitor, a company can consolidate its position, enhance its market power, and often realize cost efficiencies by merging similar operational aspects. Additionally, a horizontal acquisition may also provide instant entry into new geographical markets if the target firm has a presence in regions where the acquiring company does not. Essentially, the use of horizontal acquisition is an aggressive market strategy that seeks to take advantage of synergies between the companies in the same industry.

Examples

1. Disney and 21st Century Fox: In 2019, The Walt Disney Company, one of the biggest names in the entertainment industry, acquired 21st Century Fox for about $71 billion. Both companies are in the same business of producing and distributing films and television series. Through this horizontal acquisition, Disney not only eliminated a competitor but also strengthened its brand by adding Fox’s content to its repertoire.2. Exxon and Mobil: In 1999, two of the largest oil companies in the world, Exxon and Mobil, merged to form ExxonMobil. This is a clear example of a horizontal acquisition where two companies in the same industry combined to form a stronger entity with greater market share and reduced competition.3. Facebook and Instagram: In 2012, Facebook purchased the photo and video sharing app Instagram for $1 billion. Both Facebook and Instagram are social media platforms and serve similar markets. Through this acquisition, Facebook expanded its social media dominance by not only eliminating a potential rival but also by gaining access to Instagram’s user base and innovative photo-sharing features.

Frequently Asked Questions(FAQ)

What is a Horizontal Acquisition?

A Horizontal Acquisition refers to the process of a company buying another company operating in the same line of business or industry. This type of acquisition can be used to reduce competition or expand a business’s operations into different geographies or product lines.

What are some examples of Horizontal Acquisitions?

An example of a horizontal acquisition includes Facebook’s acquisition of Instagram, as both companies operated in the social media space. Another example is Google’s acquisition of YouTube since they are both involved in the online content and advertising industry.

What are the benefits of a Horizontal Acquisition?

Horizontal acquisitions can offer several benefits including cost efficiencies, entry into new markets, increase in market share, elimination of competition, and diversification of product or service offerings.

What are the potential downsides of a Horizontal Acquisition?

The downsides can include integration challenges, regulatory scrutiny due to potential monopoly concerns, cultural differences between the two companies, loss of brand identity, and potential layoffs due to job duplications.

How does a Horizontal Acquisition differ from a Vertical Acquisition?

A Horizontal Acquisition involves the merger or acquisition of companies operating in the same industry, whereas a Vertical Acquisition involves the merger or acquisition of companies at different production stages of the same industry.

What are the regulatory concerns associated with Horizontal Acquisitions?

Large horizontal acquisitions can potentially lead to monopolies or reduce competition in an industry, which often raises concerns among regulatory authorities. For this reason, such acquisitions may be subject to review or approval from antitrust or competition regulators.

How does a Horizontal Acquisition impact the company’s financials?

The financial impact of a horizontal acquisition can vary depending on the specifics of the deal. However, in the short term, expenses such as acquisition costs may negatively affect earnings. Over the long term, if the acquisition is successful in generating cost efficiencies or increasing revenues, it could positively impact the company’s financial performance.

Related Finance Terms

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