This entails a business acquiring or merging with another business that makes or offers similar goods or services as it does. This kind of business strategy is in contrast to the vertical integration strategy, wherein businesses expand the business activities that are upstream or downstream of their value chain. Companies looking to grow in size, increase revenue, expand to new product lines, and diversify operations may consider pursuing horizontal integration. Horizontal horizontal integration example integration occurs when similar companies merge in the same stage of a supply chain merge. As opposed to a vertical integration which helps a company shift to earlier or later in the supply chain, horizontal integration further solidifies a company’s current position along a manufacturing process. This merger also aimed at improving customer base, operational efficiency, market reach, and capacity to provide a much wider range of products or services to customers.
- Below, we show how is horizontal integration different from vertical integration.
- As opposed to a vertical integration which helps a company shift to earlier or later in the supply chain, horizontal integration further solidifies a company’s current position along a manufacturing process.
- The acquisition business was officially closed at the price of $300 million in cash and 23 million shares.
- While horizontal integration involves the merging of multiple companies within the same level and the same industry, vertical integration involves acquiring other companies on different levels of the same supply chain.
Toolshero supports people worldwide (10+ million visitors from 100+ countries) to empower themselves through an easily accessible and high-quality learning platform for personal and professional development. This is profitable when they are to start business in different countries or locations of which you do not have sufficient knowledge. To better understand the differentiation of these two business strategies, read below the practical example of two organizations that make transformation decisions for the company. Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. The merger between Volkswagen and Porsche began in December 2009, where Volkswagen purchased a 49.9 percent stake in Porsche.
The Difference Between Horizontal and Vertical Integration
Inevitably, a lot of the users overlap – although many will prefer one over the other. Consequently, this allows the combined company to capture a greater proportion of the market. If Instagram was going to take its consumers, then it was best that it acquired it early on.
The problem occurs when the forecasts were too optimistic and the synergies don’t quite pan out as intended. We then see share prices fall once the market comes to terms with the fact the efficiencies didn’t come to fruition. Facebook itself has far less competitive pressure since it acquired Instagram. That means it can protect against revenue losses and dictate prices to advertisers on its platforms.
This example of an acquisition shows an often deliberate strategy for a specific sector in which a company wants to achieve a very specific goal. Officially, Exxon bought Mobil for $75.3 billion, and the purchase enabled Exxon to gain access to Mobile’s gas stations as well as its product reserves. Thanks to the pooling of resources, increased efficiency in operations, and streamlining of procedures, today, ExxonMobil is one of the biggest oil companies in the world. The 1998 merger of two major oil companies, Exxon and Mobil, was the biggest in corporate history at the time. The integration combined the first and second largest energy corporations in the United States. Horizontal integration is the process of acquiring or merging with competitors, leading to industry consolidation.
Mittal Steel’s acquisition of Arcelor SA, as one of the horizontal integration examples
It is not surprising that major companies within each industry own a number of other brands. In some cases, companies even tend to become a market monopolist if they were not controlled externally. Horizontal integration can be defined as expanding a business at the same level of the supply chain in the same industry. This can be done by acquiring a pre-existing company and integrating it by transforming the brand, or simply adding it to the list of subsidiaries. The renowned company IBM acquired Red Hat in July 2019 which is an American multinational open-source software company.
This horizontal integration between the two oil giants was driven by falling oil prices and global competitive pressures. The merger helped the firm diversify its portfolio, with each company having a foothold in different parts of the world. For instance, Exxon had experience of deepwater exploration in Western Africa – whilst Mobil had facilities present in Nigeria and Equatorial Guinea. When two companies merge, two separate entities create a new, joint organization. The brand of one of those two companies is usually retained, though the composition of operations and personnel is shared between both of the former individual companies.
An internal expansion is reinvestment of capital by the company that shares some of the features of mergers and acquisitions. It can involve new product development or investment in the existing operations, such as geographic expansion that does not involve M&A. An example is how Samsung, a South Korean company, expanded its operations to over 200 countries across the world. A horizontal integration is an M&A transaction that occurs between two or more companies at the same point of the supply chain in the same industry. It is generally seen as a consolidation play by the companies, who hope to gain market share through the transaction.
Difference between horizontal and vertical integrations
This is a special type of horizontal integration that happens when a firm seeks control of another firm without the consent or agreement of the acquired firm. These types of takeovers are generally known as hostile takeovers that are without permission. Zara controls many levels of the supply chain, from raw materials to manufacturing and logistics. Yes, Coca-Cola has integrated with downstream bottlers, manufacturers, and other levels of the supply chain. The company owns and controls its supply chain, from raw materials to finished products. Another example from the FMCG industry is Coca-Cola which acquired many juice brands around the world.
The new Hewlett-Packard became a global player of top-level in access devices, IT services, printers, and imaging, etc. Synergies related to revenue and costs were made to create considerable value for shareholders and provide opportunities for new growth. Horizontal Integration strategy is considered as a process or a strategy in which a company seeks to increase the production of its products or services at a similar part or area of the supply chain. AT&T is a telecommunications company that has acquired other firms in that industry, such as T-Mobile and BellSouth. While the firms operate in some of the same areas, there are areas that AT&T did not operate in until acquiring those companies.
Economies of scale
Though the two companies technically join together, one company remains in control. The acquiring company’s staff, executives, and operations often remain in place, while the acquired company’s resources are integrated as management sees fit. Facebook sought to strengthen its position in the social sharing space and saw the acquisition of Instagram as an opportunity to grow its market share, reduce competition, and gain access to new audiences. Instagram is now owned by Facebook but still operates independently as its own social media platform. Here are three textbook examples of horizontal integration undertaken by companies that sought to strengthen their positions in the market and enhance their production or distribution stage.
Earlier you learned that firms were able to increase their market share and profits by introducing this strategy. Firms are also able to improve service and increase their capabilities, since the companies that they acquire often have different capabilities. They are able to better serve their customers as well as expand their knowledge of customer demands and the industry.
Through the combined resources, the new entity could serve a huge customer base with comparatively fewer assets. The cost savings occurred from employees, equipment, operations, and other aspects resulted in an annual synergy of approx. The steps following a horizontal integration determine how successful it is. Once a new firm is acquired, managers must work to assimilate the new company into its organization, eliminate waste, combine and restructure resources in a way that increases it capabilities. Both approaches (vertical integration vs. horizontal integration) work well and bring many benefits. Along with the benefits, businesses often encounter some challenges to resolve.
Horizontal integration is a way for a company to simply do better at what it was doing before. If horizontal mergers within the same industry concentrate market share among a small number of companies, it creates an oligopoly. If a merger threatens competitors or seems to drastically restrict the market and reduce consumer choices, it could attract the attention of the Federal Trade Commission.
- A corporate that implements this type of strategy usually mergers or acquires another company that is in the same production stage.
- On the other hand, horizontal integration strives to eliminate competitors, grow in market size, and create economies of scale.
- To truly fall into this category, this increased production must occur in the same part of the supply chain.
- HillRom, a global company, is best known for its manufactured hospital beds.
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Introduction to Horizontal Integration Example
The M&A transaction can be structured as an asset purchase for cash to avoid the assumption of that company’s debt and contingent liabilities. Vertical integration is achieved when companies are at different levels in the supply chain. India Cements Ltd. (ICL) raised a hostile takeover bid for Rassi Cements Ltd. (RCL) in February 1998. The open offer was made at Rs. 300 per share for 20% shares of RCL and that time the share price of RCL was Rs. 100 on SE (Stock exchange). At the public offer term, RCL’s promoter came forward to make a deal for selling his 32% stake to ICL and that too at a price lower than the price of the open offer. Simultaneously, ICL also purchased financial institutions through an open offer and thus, able to increase its stake in RCL to 85%.
Likewise, Hasbro, the second largest toy company in the market, had taken over brands such as Milton Bradley and Playskool. Using these three companies, GAP Inc. has been very successful in controlling a large segment of retailing in the textile sector. Each company has stores that sell garments designed to meet the needs of different groups.
When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly). In many instances, news stories involving mergers and acquisitions refer to horizontal integration. This is because horizontal integration examples in media refer to a company increasing its production, whether of goods or of services. To truly fall into this category, this increased production must occur in the same part of the supply chain. Horizontal integration can involve mergers and acquisitions or it may refer to a company that has grown via internal expansion.