Horizontal mergers are a popular strategy in the world of mergers and acquisitions (M&A). For businesses looking to expand, increase market share, or gain a competitive edge, understanding the concept of the horizontal merger is essential.
The M&A market has been volatile. After record recovery in 2021, global activity dropped 16% in 2023 to $3.1 trillion. This volatility, combined with macroeconomic and geopolitical challenges, has left dealmakers cautious yet optimistic about what’s next.
Despite these ups and downs, horizontal mergers continue to be a key strategy for consolidating resources, reducing competition, and gaining power in a concentrated market. A notable example from late 2024 was, Guotai Junan Securities and Haitong Securities — two companies in China’s securities and brokerage industry — who announced a horizontal merger that will create a $228 billion entity, one of the largest deals in the sector.
In this article, we’ll define horizontal merger guidelines, advantages, risks, and real-world examples, providing important insights for businesses navigating this landscape.
What is a horizontal merger?
A horizontal merger occurs when two companies operating in the same industry and at the same stage of the production and distribution process come together. Typically, horizontal mergers involve direct competitors, and such mergers aim to consolidate resources, reduce competition, and achieve market expansion.
This is in contrast to a vertical merger, which occurs when companies operate at different stages of the industry’s supply chain.
Corporate Finance Institute
A horizontal business consolidation allows two or more companies to form a merged entity within the same industry, while increasing their market power. However, harmful mergers can arise when such deals reduce market dynamics by eliminating key competitors, leading to less choice for consumers, higher market prices, or reduced innovation.
Why companies pursue horizontal mergers
Corporate mergers are driven by several strategic goals. At the core of horizontal integration is often the desire to neutralize competition, whether that is from direct rivals, new market entrants, or companies offering complementary or alternative products. The end goal is typically to have a stronger position in the marketplace and, ideally, profitable growth.
There are three types of mergers depending on how companies pursue horizontal integration:
- Merging with another company
With this approach, two separate entities combine to form a single, unified organization. Sometimes both brands remain, sharing resources and operations; other times, one brand absorbs the other. Mergers tend to happen between companies offering similar products or services with relatively equal market positions.
- Acquiring another company
Instead of merging, one company may choose to acquire another. In this case, the acquiring company takes control of the target company’s operations, integrating its staff and resources. For instance, Microsoft’s acquisition of Activision Blizzard in 2022 allowed Microsoft to strengthen its foothold in the video game market and reduce competition in the gaming industry.
- Expanding operations within the same supply chain
Companies can also achieve horizontal integration by expanding their own operations within the same supply chain. For example, a protein bar manufacturer may choose to enter the soft drink market, diversifying its product offerings and increasing market reach.
Horizontal mergers are particularly prevalent in industries like technology, retail, healthcare, and manufacturing, where businesses are continuously looking to strengthen their market position, ensure fair competition, and gain operational efficiencies.
By merging or acquiring competitors, companies involved in these sectors can achieve a more dominant position, better pricing power, and the ability to leverage scale for improved profitability.
Concentric merger definition and examples.
Benefits of a horizontal merger
Horizontal mergers offer several significant advantages, potentially leading to stronger, more efficient businesses that are better equipped to outpace competition. At the heart of most horizontal mergers is the pursuit of economies of scale, where the combination of two companies results in cost savings, improved efficiencies, and a more competitive position in the market.
Some of the key benefits of horizontal integration include:
- Achieving economies of scale
By merging operations, companies can reduce production costs, streamline processes, and improve efficiency. Larger operations allow businesses to take advantage of bulk discounts from suppliers, negotiate better deals, and lower manufacturing costs per unit produced. This scalability allows companies to operate more cost-effectively.
- Expanding into new markets
Horizontal mergers can open doors to new geographic regions or customer segments, enabling companies to diversify their reach and accelerate growth. A combined entity can leverage its expanded footprint to penetrate untapped markets, reaching a broader audience.
- Acquiring desirable product lines
Mergers often happen when companies look to broaden their product or service offerings. By acquiring complementary products or services, businesses can diversify their portfolio, cater to a wider customer base, and enhance overall market appeal.
- Increased market power
Merging with a competitor often leads to a stronger market concentration, making it more difficult for rivals to challenge the new entity’s dominance. With a larger customer base, improved pricing power, and better brand recognition, the combined company can more effectively compete with industry giants.
- Improved access to human capital
The larger, merged company gains access to a wider talent pool, improving its ability to recruit and retain skilled employees across various functions.
- Improved access to financial capital
The combined company typically has an easier time securing financing at lower interest rates due to its larger, more stable size. This better access to capital can fuel further expansion and investment in innovation.
These advantages make horizontal mergers an attractive strategy for businesses seeking not only growth but also greater operational efficiency and a dominant position in the market.
Conglomerate merger example to explore real-world cases.
Risks and challenges of horizontal mergers
While horizontal mergers offer significant benefits, they also come with risks and challenges that must be carefully considered.
- Integration difficulties
Merging two companies often involves complex integration, especially when aligning cultures, operations, and systems. This process can be time-consuming and disrupt business continuity if not managed effectively.
- Cultural clashes
Merging companies often face cultural differences that can cause friction among employees. This can lead to morale issues, reduced productivity, and even increased turnover if not addressed properly.
- Financial strain
Mergers can be costly, with companies often taking on significant debt. If synergies don’t materialize as expected, the financial strain can hurt the newly formed company’s long-term profitability.
- Antitrust issues
Antitrust agencies are particularly concerned about horizontal mergers, as they can reduce competition. These mergers are frequently the focus of regulatory challenges and can face delays or even be blocked if they harm market competition.
- Putting all your eggs in one basket
A merger may lead to overreliance on a single market or business model, especially if that market is undergoing disruption. The Walgreens and Alliance Boots merger, for example, struggled as the pharmacy industry shifted online, causing a drop in stock price.
- Scale becomes unwieldy
While mergers can bring economies of scale, they can also make companies less agile. With increased size comes more bureaucracy and slower decision-making, which can hinder innovation and responsiveness.
- Overpaying for the deal
In competitive industries, companies may overpay for acquisitions to outbid rivals. This can lead to inflated valuations and disappointing returns if the expected synergies don’t materialize.
- Reputational risk
As a company grows, it becomes more visible and a bigger target for criticism. Any negative fallout, such as regulatory or customer concerns, can harm the company’s reputation and customer trust.
How horizontal mergers affect consumers and the market
Horizontal mergers can greatly affect market competition. By consolidating two competitors into one entity, the merged company often gains more control over the market, which may lead to higher prices, fewer product variations, and less choice for consumers.
Regulatory authorities carefully review these mergers to ensure they don’t result in monopolistic behavior or reduce competition in ways that would harm the market.
While horizontal mergers can bring about improved operational resources and scalability, the loss of competition often comes with a downside for consumers. Reduced competition can limit choices, slow innovation, and ultimately lead to higher market prices or lower-quality services.
Horizontal vs vertical merger to understand the key differences.
Regulatory considerations in horizontal mergers
Navigating the regulatory environment is crucial in horizontal mergers. Antitrust laws and regulatory approvals are designed to prevent mergers that could harm competition, create monopolies, or reduce consumer choice. Regulatory bodies like the Federal Trade Commission (FTC) in the U.S. and the European Commission play a key role in reviewing these deals.
They assess whether the merger will reduce competition by giving the combined company too much market power. If regulators believe the deal will harm consumers—such as through higher prices or less innovation — they may block the merger or impose conditions.
For instance, when Disney announced its merger with 21st Century Fox, regulators expressed concerns about anti-competitive effects in the media sector. Disney was required to divest certain assets to gain approval and maintain competition while avoiding regulatory scrutiny.
In addition to divestitures, regulators may impose conditions such as:
- Limiting pricing power
- Mandating access to critical infrastructure
- Ensuring competition in specific markets
These steps help protect consumers and preserve a healthy competitive landscape. For businesses considering horizontal mergers, understanding and complying with these regulatory requirements is essential.
Real-world examples of horizontal mergers
Several high-profile horizontal merger examples illustrate how companies strategically join forces to gain a competitive advantage:
- HP & Compaq
The merger between HP and Compaq in 2002 allowed HP to expand its product lines and market share, helping it compete more effectively with rivals like Dell. By combining research, resources, and market expertise, HP aimed to boost innovation and meet the ever-changing demands of the tech industry.
- Exxon & Mobil
In 1999, Exxon and Mobil merged to create the largest oil company in the world. This horizontal merger enabled the combined company to reduce costs, streamline operations, and increase pricing power, making it a more formidable competitor in the global oil market.
- Disney & Pixar
The Walt Disney company’s acquisition of Pixar in 2006 eliminated a key competitor while also bringing in Pixar’s innovative technology and creative talent. This merger strengthened Disney’s position as an entertainment company and expanded its capabilities in film production.
- Microsoft & LinkedIn
In 2016, Microsoft acquired LinkedIn, allowing the tech giant to expand its market presence and integrate LinkedIn’s professional network with its software products. The merger enhanced Microsoft’s cloud services and improved LinkedIn’s technological reach.
- Amazon & Whole Foods
Amazon’s acquisition of Whole Foods in 2017 allowed the e-commerce giant to enter the grocery business while leveraging Whole Foods’ strong supply chain and customer relationships. Whole Foods, in turn, benefited from Amazon’s market reach and advanced delivery technology.
These examples showcase the diverse ways horizontal mergers can strengthen market positions, drive innovation, and create new growth opportunities.
Key considerations before pursuing a horizontal merger
Before pursuing a horizontal merger, companies must assess several strategic, operational, and financial factors to ensure merger’s success:
- Strategic fit
Evaluate if the companies align in terms of market position, goals, and target customers.
- Financial impact
Analyze the financial health, costs, and potential synergies, ensuring a positive return on investment (ROI).
- Operational compatibility
Ensure a smooth integration process of systems and supply chains to avoid inefficiencies.
- Cultural alignment
Assess corporate culture differences to minimize employee friction and improve morale.
- Market impact
Consider the merger’s effect on customers, competitors, and the overall market landscape.
A thorough evaluation of these factors increases the chances of a successful horizontal merger, enabling companies to unlock growth while minimizing risks.
Key takeaways
In summary, a horizontal merger offers businesses the chance to increase market share, reduce competition, and achieve operational efficiencies.
However, companies must carefully evaluate the horizontal merger advantages, assess the risks involved, and consider the regulatory and cultural challenges that may arise. By weighing these factors, businesses can determine whether a horizontal merger is the right strategic move for growth.
