What is a Horizontal Merger?

In an increasingly competitive business landscape, mergers and acquisitions are common strategies companies use to expand their market presence, increase profitability, and achieve long-term growth. Among the various types of mergers, horizontal mergers stand out due to their potential to significantly alter the dynamics within an industry.

By combining forces with a direct competitor, companies can achieve economies of scale, reduce competition, and enhance their market power. These types of mergers also raise important questions regarding their impact on market competition and consumer welfare. This in-depth guide answers the basic question what is a horizontal merger, how it works, the regulatory guidelines around mergers, and a comparison to vertical mergers.

What is a horizontal merger?

A horizontal merger occurs when two companies operating in the same industry and at the same stage of production come together to form a single entity. These companies are typically direct competitors, offering similar products or services. The goal of this type of merger is often to increase market share, reduce competition, and achieve economies of scale.

How a Horizontal Merger Works

In a horizontal merger, companies that are in direct competition with each other go through the process of combining operations. The merging companies usually offer the same or similar products or services and target the same customer base. The process involves negotiating terms, conducting due diligence, obtaining regulatory approval, and integrating operations.

• Negotiation and Agreement: The first step in a horizontal merger is the negotiation between the two companies. They discuss the benefits, potential challenges, and the value of combining their businesses. This process culminates in a merger agreement that outlines the terms of the deal.
• Due Diligence: Both companies conduct a thorough analysis of each other’s financials, operations, legal standing, and market position. This step ensures that there are no hidden risks or liabilities that could affect the success of the merger.
• Regulatory Approval: Since horizontal mergers often reduce competition, they are closely scrutinized by regulatory bodies like the Federal Trade Commission (FTC) or the European Commission. These regulators ensure that the merger does not create a monopoly or harm consumers.
• Integration: Once the merger is approved, the companies begin the process of integrating their operations. Successful integration planning must account for combining workforces, consolidating assets, and aligning strategies to operate as a unified entity. The goal is to maximize the benefits of the merger while minimizing disruptions.

Horizontal Merger Examples

Prominent examples of horizontal mergers include:

• Disney and 21st Century Fox (2019): One of the most notable horizontal mergers in recent history was Disney’s acquisition of 21st Century Fox. Both companies operated in the same industry, offering entertainment content across various platforms. The merger allowed Disney to expand its content library and enhance its position in the streaming market, particularly with the launch of Disney+.
• Exxon and Mobil (1999): The merger of Exxon and Mobil, two of the largest oil companies in the world, is another notable example of a horizontal merger. Both companies were leaders in the oil and gas industry, and their merger created one of the largest publicly traded oil companies, ExxonMobil. This merger allowed the combined company to achieve significant economies of scale and strengthen its global presence.
• Coca-Cola and Glacéau (2007): Coca-Cola’s acquisition of Glacéau, the company behind Vitaminwater, is an example of a horizontal merger within the beverage industry. Both companies operated in the non-alcoholic beverage market, and the merger enabled Coca-Cola to diversify its product offerings and tap into the growing health-conscious consumer segment.

Horizontal Merger Guidelines

Horizontal mergers are governed by strict guidelines to ensure they do not harm competition or consumers. These guidelines are established by regulatory bodies and vary by jurisdiction, but they generally focus on the following areas:

• Market Definition: Regulators first define the relevant market in which the merging companies operate. This involves determining the products or services offered by the companies and identifying their competitors.
• Market Concentration: The next step is to assess the level of market concentration post-merger. Tools like the Herfindahl-Hirschman Index (HHI) are used to measure the change in market concentration and determine if the merger will significantly reduce competition.
• Potential Anticompetitive Effects: Regulators evaluate whether the merger could lead to higher prices, reduced innovation, or lower product quality due to reduced competition. They consider factors like the elimination of a key competitor, the ability to raise prices unilaterally, and the potential for coordinated behavior among remaining competitors.
• Efficiencies: While horizontal mergers can raise antitrust concerns, they can also create efficiencies that benefit consumers. These efficiencies might include cost savings, improved production processes, or enhanced product offerings. Regulators assess whether these efficiencies are merger-specific and substantial enough to offset any potential anticompetitive effects.
• Failing Firm Defense: In some cases, a horizontal merger may be allowed if one of the companies is failing and would exit the market without the merger. This defense argues that the merger would not reduce competition because the failing firm would no longer be a competitor anyway.

Horizontal vs. Vertical Merger

While a horizontal merger involves companies operating at the same production stage and within the same industry, a vertical merger is different in that it occurs between companies at different stages of the supply chain. For example, a vertical merger might involve a manufacturer merging with a supplier or distributor.

Key Differences:

• Purpose: The primary purpose of a horizontal merger is to increase market share and reduce competition, while a vertical merger aims to improve efficiency and control over the supply chain.
• Regulatory Scrutiny: Horizontal mergers often face more intense scrutiny from regulators because they have a direct impact on competition within the market. Vertical mergers, while also subject to regulation, are generally seen as less likely to reduce competition.
• Impact on Competition: Horizontal mergers can lead to market consolidation, which may result in higher prices and reduced consumer choice. In contrast, vertical mergers can lead to increased efficiency and lower prices for consumers by streamlining the supply chain.

Expertise for Successful M&A Planning

Horizontal mergers play a significant role in shaping industries by consolidating competitors and increasing the market power of the merged entity. While they offer the potential for significant benefits, including economies of scale and enhanced market presence, they also raise important regulatory concerns related to competition and consumer welfare. Understanding the intricacies of what is a horizontal merger and how this type of merger differs from other types, including vertical mergers, is essential for businesses considering this strategic move.