Introduction to Horizontal Integration Example
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 the economies of scale and increase synergies. It is different from vertical integration in which entities occupying different stages in the supply chain are merged. Over the years there has been much horizontal integration in the real world which has helped in the growth of the entities and helped them capture an increasing market size. Here we will look at some of the latest real-life examples of horizontal integration to get an idea of what motivations lead to this process and how it has benefited businesses:
Examples of Horizontal Integration Example
Some of the recognized examples are described below:
Example 1: Basic
- Wernham Hogg and Dundler Mifflin are involved in retailing pens and paper respectively. This is the last step in bringing the product to the eventual buyers. The early part of the supply chain is handled by the other entities involved in procuring the raw materials, getting them manufactured and then distributing it to the retailers. Given that the market for the two products isn’t diametrically different, certain entities are common to both illustrated by the following table below:
- If Hogg and Mifflin merge together, this would be termed as horizontal integration. The resultant entity formed would be involved in both the retailing of pens and paper. The cost involved in manufacturing and distribution would be considerably lowered since the new entity will have common partners. Also, the new entity could enhance its production capacity and ensure that the synergies between the products could be shared. Although the integration is between entities of the same industry, the products involved are diverse.
Example 2: Practical – Disney & Pixar
- The Walt Disney Company was established in 1923 as an animation studio that later forayed into live-action film production, television and theme parks. After a slew of successful ventures till the early 21st century, it began to experience a stage of stagnation and was looking at ways to reinvent itself.
- Pixar started off as in 1986 with a contribution from Steve jobs as an American computer animation studio. In 1995 it produced its first film, Toy Story which marked the beginning of a successful foray into animation movie making.
- The proposed merger kicked off by Walt Disney was a prime example of horizontal integration working in the same industry. Apart from the usual benefits of the coming together of the finest entities in the industry, it also worked as a means to ward off potential competition for Disney and thus continue and potentially improve on its market share.
- In 2006, Disney acquired Pixar in a $7.4 billion deal. Disney merged its existing expertise in 2D animation with the state of the art production value of Pixar and has since been able to consistently deliver great works in the movie-making business. Pixar retained its core values and did not allow Disney to change the winning culture that defined Pixar. The best of both organizations has thus come together to have become one of the biggest production houses in the world.
Example 3: Practical (India) – ACC & Damodar Cement
- ACC (Associated Cement Companies) Cement expanded its coverage in the eastern part of India by acquiring Damodar Cement in 2005. It had earlier expanded in the ready-mix concrete plant section but this was the first expansion with regards to cement capacity. The chairman of ACC then described the merger as one that would bring in operating efficiencies, productivity, and economies of scale.
- The merger was said to increase the capacity by 1.5 lakh ton. Post the merger, ACC further invested $3 million on improving the grinding capacity and better utilization of raw materials in Damodar cement. Usually, the horizontal integrations such as these are subject to high scrutiny such that it may not allow a monopoly in a particular sector to the adversity of the customers there.
Example 4: Practical – Vodafone & Hutchison
- Vodafone was established in 1983 as Racal Telecom in the United Kingdom while Hutchison Essar was founded in 1985 in Hong Kong as a telecommunication services provider to several Asian countries. Sometimes, it is just not the acquiring entity’s interest that gives rise to the merger, rather it could also be the underperforming entity that attracts the merger. For Hutchison, the urban markets were below par with falling average revenue per user. It wanted additional funds to expand its business operations in Europe. Overall the lower returns on its investments were not making things easier for it.
- For Vodafone, the objective was to consolidate its position as one of the leading telecommunications companies with increased expansion in markets such as India where Hutchison had already established itself for a few years. The western markets were saturating and as a means for a growth trajectory in developing countries, this deal sounded just about right.
- Vodafone acquired a 67% stake in Hutchison Essar with the deal valued at $11.1 billion. There was a considerable increase in net profit ratio, return on investment and earnings per share post the merger.
Conclusion – Horizontal Integration Example
Horizontal Integration generally takes place between firms with similar products, operations or services. Even when the merger between two different industries take there is a common point in terms which is made use of. Although vertical integration is more effective at bringing operational efficiency and shutting down overhead costs, there is no denying that horizontal integration leads to better market capture, reduction of competition and increased dealing of products. The improvement in economies of scale more than offsets the cost that was incurred as part of the integration deal.
However, as the Sysco acquisition of US Foods in 2015 showed, there is increased jurisdiction on such mergers. The Federal judge in this scenario ruled against the deal as such a deal would control more than 75% of the market and stifle competition. That said, more horizontal integration deals are lined up in the future and isn’t diminishing anytime soon.
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