Companies must carefully consider the advantages and disadvantages of a horizontal merger and seek legal and financial advice to ensure compliance with regulations. Successful horizontal mergers require careful planning, execution, and maintaining a competitive and innovative market. Do you know what a horizontal merger is? It is a business consolidation between two companies, often in the same industry. A horizontal merger is primarily for the benefit of both parties involved in the consolidation. It also leads to an increase in the value of both organizations.
Horizontal mergers are often driven by a desire to increase market share, reduce competition, and achieve economies of scale Horizontal mergers can also result in the consolidation of resources, expertise, and technologies for increased efficiency and profitability. However, these types of mergers may raise concerns about reduced competition, potential antitrust violations, and the impact on consumers and small businesses in the industry.
Did you know? A horizontal merger can significantly increase revenues, as the merged companies can access various products and services. Vodafone India and Idea Cellular Limited is an example of a horizontal merger.
What Is a Horizontal Merger?
To understand the meaning of a horizontal merger, you should know its primary purpose. A horizontal merger occurs as companies attempt to develop a more efficient economy of scale and enhance market power. It is also helpful in making the most of revenue synergies, as there is high competition in the current market. With horizontal mergers, companies can achieve substantial financial gains. For example, if a company outsells another, the other can acquire it, which is known as horizontal acquisition. It proves more profitable for both entities involved.
How Does a Horizontal Merger Work?
The most efficient horizontal merger brings profits from every aspect of the value chain. This includes the supply chain from a more prominent company that can receive better product discounts. This profit chain ends with the customer base. Remembering that the consumer base doubles as part of the merger is also essential. One example of such a merger is HP and Compaq. It made eliminating competition more accessible for HP. As a result of the merger, a new hope for better innovation has been created, and the company has been aiming to adapt to the new demands of the market and changing times.
What Are the Reasons Behind a Horizontal Merger?
The primary motive for all companies adopting horizontal mergers is value. The merger should generate more revenue/profits than it did under single ownership. While various reasons can lead to a horizontal merger, some of the main reasons are as follows:
1. Increased Size and Reduced Competition
The most compelling reason is to eliminate emerging competitors from the market by increasing the company's size. By merging two companies, they also add the consumer base, which amounts to more customers. This leads to a larger market share which can easily outshine all other companies.
2. Increased Power and Growth
Horizontal mergers are an excellent way to access more resources and products. Many leading companies make it their primary development strategy to merge horizontally. Disney is an example. Horizontal mergers enable companies to create a place for themselves in the current market.
3. To Leverage Economies of Scale
Economies of scale mean the cost advantage companies get when increasing output. This advantage is due to the inverse relationship between cost per unit and production quantity. So in a horizontal merger, companies have to buy in bulk to meet the demands of the new large customer base. As a result, supply chain costs decrease, bringing more financial gains for the companies.
4. Gaining Resources
As we all know, along with the merger come expanded resources. For example, the merger brings a pool of new talent. A successful merger seeks to use talent and ideas to generate more productivity and profitability. In terms of workforce, such mergers can introduce a company to new skill sets to achieve tremendous success.
5. Create a New Market
Companies can also establish their brand in new locations through a horizontal merger, enabling access to newer markets. Companies can even venture into new products with two companies' resources, increasing the chances of achieving more success.
What are the Potential Issues in the Success of a Merger?
There are certain circumstances when companies may be unable to access the full benefits of a merger. Sometimes it can also lead to various challenges, including:
1. Lesser Productivity
It cannot be easy to combine two cultures from two distinct companies. People from different work cultures might find adapting to the new one challenging. It can create differences among employees, leading to less productivity and adversely impacting their way of working.
2. Disruption in Work Styles
Every company follows a particular management style. However, when it changes, employees can find it challenging to connect with it. It can lead to workflow disruption and prove troublesome to building a working relationship. It can also create difficulty in attaining synergy, generating many problems in realizing its full potential. This can reduce the overall value.
3. Higher Product Costs
When a horizontal merger adversely affects competition, it is prohibited by the Competition Act 2002. For other companies, merging two companies can result in a higher cost of items, creating challenges for the consumer.
What are the Advantages and Disadvantages of a Horizontal Merger?
Listed below are some advantages and disadvantages of a horizontal merger.
Advantages of the Merger
It is essential to consider the benefits of the merger. Some of them are as follows:
- Companies can get more discounts on their supplies. It is because of the order limit increase.
- It also reduces the cost of manufacturing per unit.
- It also gives them better access to resources. A new company brings more talent and a variety of ideas.
- It opens up wide horizons for success.
- It also gives companies access to a larger customer base. The company grew in all spheres due to the horizontal merger.
Disadvantages of the Merger
The disadvantages of a horizontal merger are as follows:
- It can be opposed due to the Competition Act 2002, which prohibits mergers between two companies, adversely affecting competition.
- Putting your bets on a single aspect might not be the best idea. It can also lead to price drops.
- Companies that opt for mergers also lack agility.
- When two competitors merge, insecurities can arise. It makes managers all the more overprotective. They become more cautious than necessary, often leading to wrong decision-making. For example, it can lead to overpricing of deals.
- The merger can also become a competitor's target as the merged company grows. As a result, the company's reputation can suffer.
The Difference Between a Horizontal Merger and a Vertical Merger
The two terms confuse people. Knowing the difference between them is essential to answer the question, what is a horizontal merger? The section highlights the meaning and definition of horizontal and vertical mergers.
A horizontal merger is between two companies from the same industry
A vertical merger refers to merging two companies offering distinct supply chain functions for a similar good or service
n horizontal mergers, the expansion of business sectors leads to an increase in production.
Vertical mergers lead to enhanced efficiency.
Horizontal mergers are helpful in combatting competition.
Vertical mergers strengthen production and distribution.
While a horizontal merger is between two companies from the same industry, a vertical merger refers to merging two companies offering distinct supply chain functions for a similar good or service. It can often lead to cost reduction and increased efficiency. A vertical merger's primary responsibility is controlling the supply chain in the initial stages. For example, a vertical merger occurs between two suppliers who supply raw materials to the same company, but the two companies offer different services. For instance, a merger between a manufacturer and a distributor.
Some vertical merger examples are as follows:
- Disney and Pixar's merger was advantageous for both. With it came an animation studio for Disney, while Pixar found a better distribution network.
- Google acquired Android in 2005. With it, Google gained access to the mobile industry.
Horizontal mergers increase efficiency, save costs, and offer enhanced control over the supply chain. Businesses can streamline operations, reduce transaction costs, and improve product quality by merging companies operating at different stages of production. However, horizontal mergers have drawbacks, such as antitrust concerns, decreased competition, and innovation.
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