Horizontal vs. vertical mergers: Differences and examples

A merger describes the process of two privately held companies or public companies uniting into one completely new entity to face strong prospects in the industry or conquer new markets. These two companies are of comparable size and have similar growth goals. A new legal entity gets unique branding, and a new stock price is formed.

Dealmakers opt for mergers and acquisitions for many different reasons: it might be to grow the business, to diversify, to avail of tax benefits, to achieve revenue synergies and more. Consequently, the M&A deals scenario presents itself as miscellaneous with many types of deals reflecting the needs of dealmakers.

This article discusses horizontal and vertical merger as the main types of mergers and acquisitions. Read on to learn the difference between a horizontal vs vertical merger and explore real-life examples of horizontal mergers and vertical mergers.

What is a horizontal merger?

A horizontal merger occurs when two or more companies operating in the same industry merge into one combined company. A horizontal merger is also often called a horizontal acquisition.

Such a merger in one company helps two different companies from the same or similar industry to eliminate the competition in their market and gain a larger market share.

For example, if two companies sell similar products, their combined horizontal merger helps to increase market share. Or, when one company sells complementary products to the other, the merged company can then offer a wider range of products to customers and thus diversify its offerings and explore new markets.

Horizontal mergers are usually strictly monitored by governments to keep fair competition. This is because such mergers can create monopolies in the market.

Reasons for horizontal mergers

The main purpose of a horizontal merger is to create value. A successful horizontal merger should create value, where combining two companies are worth more than when each company operates individually. In other words, “1+1” should be bigger than “2.”

Other reasons for horizontal mergers include:

• Reducing competition in the market
• Increasing market share and market power
• Reducing costs
• Achieving economies of scale
• Enhancing diversification
• Benefiting from combining complementary skills and resources

What is a vertical merger?

Unlike horizontal mergers, a vertical merger occurs when two or more companies operating at different stages of production merge. In other words, the acquiring company and target company operate in one broad industry but at different stages of the same supply chain.

Vertical mergers take place when, for example, a manufacturer acquires a supplier, and together, they become a combined company that operates in one supply chain for a certain item’s production.

Reasons for vertical mergers

Just like with horizontal mergers, the key purpose of vertical acquisitions is to create value. The merger is considered successful when a single company formed from separate entities is worth more than the combined companies are worth together. In other words, “1+1” should be bigger than “2,” again.

Other common reasons for vertical mergers include the following:

• Increasing efficiency
• Reducing costs
• Increasing profits 
• Gaining merger synergy (operational, financial, and managerial)
• Ensuring greater quality control
• Ensuring better flow and control of information alongside the supply chain

Note: Learn how to calculate synergies in M&A in our dedicated article.

Examples of vertical and horizontal mergers

Let’s briefly review some of the most famous examples of vertical vs. horizontal merger.

Horizontal merger

One of the most famous examples of a horizontal merger is the deal between Walt Disney and Pixar, announced by the Walt Disney Company on January 24, 2006, signed on May 5, 2006, and worth $7.4 billion.

Disney is a mass media and entertainment company, and Pixar is a notorious computer animation studio. At the time of the merger announcement, Disney’s own animation films were failing, while Pixar’s animation production was successful. The main purpose of the merger was Disney’s desire to improve the quality of its products and reduce the competition in the market.

The deal is still considered one of the most profitable mergers, with the incredible success of such animated movies as Cars 2, Toy Story 2, or Up.

Vertical merger

One of the most prominent examples of a vertical merger is the deal between eBay and PayPal, announced by eBay in August 2002, signed on October 3, 2002, and worth $1.5 billion.

This is a classic example of a vertical merger. eBay is an online shopping platform, and PayPal is an online money-transferring service that allows customers to make payments.

With this acquisition, eBay wanted to gain control over a popular payment service and increase the number of online payments via eBay. However, despite the temporary positive outcomes, PayPal became an independent company after eBay spun it off to shareholders in 2015.

Pros and cons of horizontal and vertical mergers 

Now, let’s take a closer look at how exactly companies can benefit from horizontal and vertical mergers and the downsides of such integrations.

Pros of horizontal mergers

• Reduced competition
• Faster inorganic growth
• Expanded business segments
• Increased production
• Business diversification
• Economies of scale
• Increased market share 

Cons of horizontal mergers

• Post-merger integration plan challenges
• Tighter governmental control
• Challenges with different management styles
• Certain product’s elimination

Pros of vertical mergers

• Enhanced efficiency
• Efficient quality control
• Operational cost reduction
• Improved management and administrative functioning
• Stronger production and distribution channels

Cons of vertical mergers

• Additional costs for maintaining adequate control
• Risk of losing key personnel
• Possible corporate culture clashes

Differences between a vertical and a horizontal merger

Horizontal and vertical mergers mainly differ in three concepts: nature, purpose, and independence.

Nature

• A horizontal merger takes place when two similar companies operating in the same or similar market and direct competitors merge into one company.

• A vertical merger occurs when two companies that operate in the same supply chain but provide different products or business services and are not competitors merge.

Purpose

• The key reason for a horizontal merger is to increase market share and eliminate the existing competition.

• On the other hand, the main reason for a vertical merger is to reduce costs and improve the current functioning of a supply chain.

Independence

• After a horizontal merger, the combined company doesn’t become independent in its operations. It still depends on other service providers when completing the supply chain.

• Whereas after a vertical merger, a combined company might become fully independent in its operations. This is possible because two entities that are at different levels of the supply chain merge and fill each other’s needs.

How to understand which merger is suitable for you?

Knowing what type of merger best suits the needs of your business is essential. This is because after you’ve determined the merger you need, you can start searching for the most appropriate candidate in the market.

At the same time, the choice of merger solely depends on your business needs.

For example, horizontal mergers are more recommended in case you seek an increase in market share and the possibility to reduce the competition.

On the other hand, vertical mergers might be a better option if you want to become a stronger competitor yourself and reduce costs.

Key takeaways

• A horizontal merger takes place when two companies from the same or similar industry merge.
• A vertical merger occurs when two companies that operate in the same or similar industry yet at different stages of the same supply chain merge.
• The difference between a horizontal merger and a vertical merger is that during horizontal mergers, a buy-side M&A and an acquired company are direct competitors, while during vertical mergers, two companies operate on the same supply chain and are not competitors.
• Among horizontal mergers examples, the most famous is the deal between Walt Disney and Pixar.

• Among the top vertical mergers examples, the brightest is the deal between eBay and PayPal.