The firm may then have a South America, European, Asia, and African division to contend with. So to implement a company-wide change requires significant levels of planning to implement through its various divisions. Not only does this become difficult to implement, but is also time-consuming. This is why we have seen many big companies fail through the years – think of Sears, Blockbuster, and Blackberry. This could range from duplicating work to financial over-spend to a decline in efficiency due to a lack of competition.
- When we look through examples of companies that have undergone horizontal integration, we find a lot of them were facing cost pressures.
- In this article, we will be discussing some real-life examples of horizontal integration companies and how it has contributed to their growth.
- As is the case with any merger, there is a risk that a horizontal merger will not result in the expected cost savings and revenue enhancements.
- The structure of this merger was stock-to-stock including exchange ratio i.e. 0.63 of HP share on every Compaq share.
- The acquisition of Cadbury’s provided scale for its snacks business, especially in emerging markets.
Companies can gain institutional knowledge, expertise, and strengths that they may lack from another firm. Ultimately, integrating firms reduce their costs while increasing revenues. When merged through horizontal integration, companies that used to compete can cut back on any products that are not performing well in the consumer market and focus on their strongest performers. It isn’t always easy to maintain a corporation after this sort of structural change, but a properly planned strategy may prove successful. Following are several horizontal integration examples today and the companies that have made the process work for them.
Where a company buys another firm (referred to as the ‘target’) folding the target’s operations into its own, enabling the company to build scale. An example is the acquisition of multiple smaller regional and national banks by Santander from the 1970s onwards to build a global retail banking giant. Horizontal integration is not illegal, but the competition commission has the power to prevent deals from going through if it deems the deal would create a monopoly, or significant market power. Two of the biggest oil and gas companies – Exxon and Mobil – merged in 1998, in a deal worth over $75 billion. The resulting company, ExxonMobil, is now the third largest company in the world and revenues of over $280 billion. In 2012, Facebook purchased the photo-sharing app, Instagram, for $1 billion.
An example of this type of company are various companies within the oil-industry. This type of company can have the control of exploration, drilling, production, transportation, refining, commercialization, distribution, etc. The company Apple is an example of this, since it took advantage of its intelligence in the manufacturing of telephone products (iPhone) to open up new markets such as tablets. These days Apple is one of the biggest companies in the world in terms of having access to various markets in the world of technology.
In business when someone refers to horizontal integration or lateral integration, they are referring to a strategy in which a firm acquires similar firms to increase its market share and profits. A firm’s market share is its percentage of total sales over a specific period of time in a market, a pool of current and future customers. Firm’s adopt this strategy as a way to strengthen their position in the market. Vertical integration is a merger and acquisition (M&A) strategy to purchase vendors (through backward integration) or distributors (through forward integration) in a company’s supply chain. Vertical integration can increase parts quality and timeliness, gain technology, reduce costs, and increase control over processes in manufacturing a product or providing a service to customers. A different type of merger is vertical integration, which is when companies merge that are in different positions in the value chain.
Types of Horizontal Integration
In addition, the product line of both companies is often similar and equally competitive in the market. After the merger, LN Mittal was named as the president of Arcelor-Mittal and became the majority stakeholder in the company. The merger created a massive global manufacturer that is responsible for around 10 percent of the world’s steel production. horizontal integration example The combined entity of Arcelor-Mittal is the world’s largest steel producer. It was so named from the companies that joined together to create it, Arcelor SA and Mittal Steel Company. Horizontal integration, also known as lateral integration, is an acquisition of or merger with a company that operates in the same phase of the supply chain.
Instagram is one of Facebook’s biggest competitors in the social media sphere. Mergers based on horizontal integration are subject to heavy scrutinization because they can often result in a monopoly where one company dominates the market. Horizontal integration also reduces the level of competition in the market while boosting the revenue of the participants who otherwise may not have prevailed in a fierce market environment independently.
An acquisition happens when a firm buys either all shares or most of the shares of another firm in order to have control of that firm. An acquisition takes place once the buying firm obtains or purchases over 50% ownership of another firm. The acquisition is considered as a common horizontal strategy that businesses adopt and may happen with the approval or permission of the target firm.
The comparison of vertical and horizontal integrations
When they do so, they combine their manufacturing capabilities, effectively doubling their output of the product. Now they can buy larger quantities of product in bulk, which effectively makes each unit cost less to produce because more product is being shipped the same way for the same amount. This creates an economy of scale for the merged companies and their computer chip market. 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. So, when a company that manufactures cutting boards gains ownership of the company that provides the lumber for them, this is vertically integrating.
A typical horizontal integration example is the acquisition of Starwood by Marriott in 2016. However, in 2016, Marriot acquired Starwood and closed on a deal wherein the shareholders of Starwood were given 0.8 shares of the merged entity against every Starwood share they held. After the merger, Marriott had access to over 6,000 properties in about 125 countries.
What Is the Difference Between Horizontal Integration and Vertical Integration?
For this reason, horizontal integrations have tended to be popular among executives in industries where scale brings competitive advantage. Horizontal integration is where a business joins with another at the same stage of the supply chain. For instance, a merger between Nike and Adidas would be an example of horizontal integration. If there are several horizontal integration mergers within the same industry that concentrate market share with a small number of companies, this is considered an oligopoly. If the resulting market share is largely held by one entity, this is considered a monopoly. In either case, the acquirer may be investigated under anti-trust laws, and a proposed acquisition may be rejected.
Through integration, the parties involved can share institutional knowledge while reducing expenses. She owns her own content marketing agency, Wordsmyth Creative Content Marketing, and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent. In 1998, German carmaker Daimler-Benz AG merged with Chrysler Corporation, the smallest of the three US automakers – Daimler bought 92% of Chrysler to form DaimlerChrysler AG. It was called the ‘Merger of Equals’, but has gone down in business history as a disaster.
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She is a former CFO for fast-growing tech companies with Deloitte audit experience. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg. Private equity firms provide debt financing for leveraged buyouts when companies are taken private or privately held at deal time. Lockheed Martin Corporation terminated its attempted Aerojet Rocketdyne vertical acquisition of a supplier in February after the U.S. This is an example of a backward integration attempt to purchase a parts supplier.
However, in 2018, the estimated value of Instagram was said to be more than $100 billion; which was a return of 100% in just over six years. This means that the horizontal integration used by Facebook was definitely a successful strategy to grow its market share, reduce competition, and gain access to larger and new audiences. Horizontal integration is important as it allows many firms to benefit from the synergies that can be achieved. In industries that are facing cost pressures, some are forced into integrating with another firm in order to reduce costs and stay in business. Others join purely in order to maintain a strong market position against a competitor that is taking more and more market share.
Mergers mostly occur in highly intensive industries where competition remains in fewer firms and favorable synergies are there. As both companies compete with each other on the same level of the supply or value chain, developing economies of scale is possible by combining their operations. Horizontal integration, in turn, refers to expanding operations by merging with similar companies at the same level of the supply chain.
As a horizontal integration, in July 2022, JetBlue Airways Corporation submitted a winning bid to buy Spirit Airlines for $3.8 billion, subject to U.S. government antitrust regulatory approval. Both companies operate a fleet of passenger airlines and offer limited air freight service in the cargo hold of the planes. When a business acquires business or operation of a competitor or buyer or supplier or seller then the strategy in which they engaged is considered as integration. Horizontal integration can be an effective strategy to increase profits for a business.
Alternatively, it may be to achieve greater purchasing power over suppliers – thereby reducing the cost of the inputs. Horizontal Integration refers to the merger of two concerns at approximately the same level in the production supply chain hierarchy. They may belong to different industries but come together to improve economies of scale and increase synergies. One of the most definitive examples of horizontal integration was the acquisition of Instagram by Facebook (now Meta) in 2012 for a reported $1 billion. Both companies operated in the same industry (social media) and shared similar production stages in their photo-sharing services. Baxter International Inc acquired HillRom in December 2021 with horizontal integration to provide customers with HillRom and Welch Allyn products and services in the medical industry.
Difference between horizontal and vertical integrations
Stakeholders benefited when the companies initially merged, and once the two were completely combined, United Continental Holdings became the largest airline in the world. Horizontal integration does not necessarily have to occur through a merger or acquisition. Companies that use Horizontal Integration want to achieve the positioning of the company at the level of territorial expansion. A supermarket company wants to offer the possibility of home delivery to its customers, however, instead of hiring a food transport company, it establishes its own distribution carts to carry their products. With Vertical Integration, expansion actions are developed in new business operations in the various production and distribution processes of the company. A company using Horizontal Integration merges or acquires other companies that produce or provide the same services with the goal of generating market positioning.
Similar to the structure of Disney and Pixar, Instagram still operates independently with its own teams, but it is owned by Facebook. For example, if Company A, a mining business, merges with company B, another mining operation, this is a horizontal integration – they are both in the commodities/raw materials stage of the supply chain. These advantages of Horizontal Integration can lead to the growth of partnerships in R&D, production, offering of products and services and more. Tata Steel acquired Corus which is the Anglo-Dutch steel producer in January 2007 and the deal was made at the US $12.11 billion.