Horizontal Merger

Definition

A horizontal merger is a business consolidation that occurs between firms operating in the same space, usually as competitors offering the same goods or services. This strategy is primarily used to increase market share, reduce costs, expand into new segments, or benefit from synergies. Essentially, it’s a merger between two companies that are direct competitors in terms of product lines and markets.

Phonetic

The phonetics of the keyword “Horizontal Merger” are:Hor-i-zon-tal = /ˌhɔːrɪˈzɒntl/Merger = /ˈmɜːrdʒər/

Key Takeaways

1. Consolidation: A horizontal merger often results in the consolidation of companies in the same industry. This can lead to a larger market share or a stronger competitive position. However, it also runs the risk of creating a monopoly or reducing competition, which can have negative impacts on consumers and the marketplace.
2. Operational Efficiency: Horizontal mergers can improve operational efficiency by enabling companies to benefit from economies of scale. By merging with a competitor, a company can increase its production volume and reduce costs per unit. Merging companies might also be able to share technologies or other resources, leading to further efficiency gains.
3. Regulatory Scrutiny: Because of the potential for reduced competition or the creation of a monopoly, horizontal mergers often face high levels of regulatory scrutiny. Regulators such as the Federal Trade Commission or the Department of Justice in the United States often review such mergers closely to ensure they do not violate antitrust laws. In some cases, regulatory hurdles can prevent a proposed merger from being completed.

Importance

A horizontal merger is an important concept in business and finance because it refers to the consolidation of companies operating within the same industry, typically with the aim of achieving competitive advantages, such as economies of scale, diversification, increased market share, or cost-efficiency. This strategy is often used by firms aiming to expand their reach, add complementary services, reduce competition, or improve their overall financial performance. However, it’s crucial to assess potential antitrust concerns as they could lead to regulatory hurdles. Understanding the implications of a horizontal merger aids businesses and investors in making informed decisions and planning future strategies.

Explanation

The central purpose of a Horizontal Merger is for two companies operating in the same industry and often at the same stage of the production-supply chain, to combine and consolidate their commodities or services. By merging, these businesses aim to achieve an improved economy of scale, expanded market share, and increased revenue. This strategy is often adopted by companies aiming to gain a competitive advantage or reduce competition within the industry. For instance, a horizontal merger might occur between two retail companies selling similar products, with the aim of increasing their geographic coverage and customer base.Another pivotal use of a horizontal merger is to achieve cost efficiencies through synergies. The merger can enable cost savings by eliminating duplicated departments or operations, lowering the costs of production, enhancing purchasing power to fetch better deals from suppliers, and spreading out advertising cost over a broader range of output. Furthermore, a horizontal merger can equip the newly merged enterprise with an expanded portfolio offering, providing cross-selling opportunities and the potential to diversify risks. Hence, horizontal mergers often represent strategic business decisions geared towards bolstering industry standing and driving long-term growth.

Examples

1. Walt Disney and 21st Century Fox: In 2019, Walt Disney completed a merger with 21st Century Fox, acquiring its entertainment assets for approximately $71.3 billion. This is an example of a horizontal merger as both companies were in the same industry – entertainment, and the merger was done to strengthen Disney’s entertainment offerings and expand its media reach. 2. Exxon and Mobil: In 1999, Exxon and Mobil, two of the biggest oil companies, completed a merger, creating ExxonMobil. Both companies were engaged in the same business – oil exploration, extraction, refining, and distribution. Their merger resulted in an even larger entity, ExxonMobil, that had greater resources, assets, and market share. 3. Sirius Radio and XM Satellite Radio: In 2008, these two companies, both providing satellite radio services, merged to form Sirius XM Radio. This combination allowed them to minimize competition, save costs, and provide a wider variety of radio programming content.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Monopoly
• Market Consolidation
• Economies of Scale
• Antitrust Laws
• Synergy

Sources for More Information

• Investopedia
• Corporate Finance Institute
• Economics Help
• MBA Skool