EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login
Home Finance Finance Resources Investment Banking Basics Horizontal Merger
Secondary Sidebar
Finance Blog
  • Investment Banking Basics
    • Trust Fund
    • Short Sale in Real Estate
    • How to Invest in Stocks
    • Penetration Pricing Strategy
    • S Corporation
    • Special Purpose Entity
    • Wholesale Price Index
    • Hyperinflation
    • Stagflation
    • Capital Structure
    • Pecking Order Theory
    • Private Placement of Shares
    • What is Stock Market
    • Pyramid Scheme
    • Introduction to Stock Market
    • Fiscal Policy
    • Trust Account
    • Zombie Company
    • Aggregate Demand (AD)
    • Aggregate Supply
    • Diluted EPS
    • Limited Partnership
    • Leveraged Finance
    • Liquidation
    • Holding Company
    • Kickback
    • Kiting
    • Financial Instrument
    • Finance Charge
    • Free Cash Flow to Firm Formula
    • Personal Income
    • Enterprise Value
    • Joint Liability
    • Return on Average Equity
    • Factor Models
    • Beta in Finance
    • Leverage Ratio
    • Investment Partnership
    • Banker??s Acceptance
    • Internal Sources of Finance
    • Insolvency
    • Intercreditor Agreement
    • Forfaiting
    • Debt Restructuring
    • How to Buy Shares?
    • Indenture
    • Incumbency Certificate
    • In House Financing
    • Independent Director
    • Insourcing
    • Holding Company Examples
    • How to Get Into Project Finance
    • How to Manage Your Money
    • Finance vs Consulting
    • Agency Problem
    • Article of Association
    • Career and Scope After B.Com
    • Capital Rationing
    • Financial Guarantee
    • Corporate Governance
    • FHA Loan
    • Fannie Mae
    • Financial Market
    • Fixed Capital
    • Fixed Rate Mortgage
    • Foreign Corrupt Practices Act
    • Foreign Investment
    • Finance vs Marketing
    • Functions of Financial Markets
    • Grace Period
    • Gift of Equity
    • Greenwashing
    • Hard Money Loan
    • CFO Job Description
    • Corporate Finance vs Investment Banking
    • Corporate Finance vs Project Finance
    • Career After BFM/BAF
    • Form S-8
    • Market Cap vs Enterprise Value
    • Quantitative Analyst Career
    • Leveraged Buyout Model
    • Mistakes in Discounted Cash Flow
    • LBO Analysis
    • Golden Handshake
    • Asset Management Company?
    • Private Placement?
    • Marking to Market?
    • Horizontal Merger
    • Special Purpose Vehicle
    • What is Investment Banking?
    • Spin off vs Split off
    • Vertical Merger
    • Merger and Acquisition Process
    • Conglomerate
    • Horizontal Merger Examples
    • Amalgamation
    • LBO Financing
    • Types of Joint Venture
    • Merger
    • Acquisition
    • Greenmail
    • Reverse Merger
    • Sandbagging
    • Pac Man Defense
    • Backward Integration
    • Poison Pills
    • Green Shoe Option
    • Hostile Takeover
    • Forward Integration
    • Acquisition Financing
    • Types of Acquisition
    • Project Budgeting Template
    • Commercial Bank vs Investment Bank
    • Private Equity vs Venture Capital
    • Degree of Operating Leverage
    • Sales and Trading
    • Revenue Recognition Principle
    • Hedge Fund Strategies
    • Merger Examples
    • Vertical Integration Example
    • Vertical Merger Example
    • Financial Markets
    • Equity Examples
    • Biggest IPO's in History
    • Cross Border Merger and Acquisitions
    • Leverage Buyout
    • Mergers and Acquisitions in India
    • Project Financing in India
    • Investment Banking for Dummies
    • Equity Research Report Rules
    • Mergers and Acquisition in 2013
    • Investment Banking Band Chart
    • IPO For Investors
    • Yield Spread
    • Angel Investor vs Venture Capital
    • CFA vs CA
    • Merger vs Amalgamation
    • Joint Venture vs Strategic Alliance
    • Carees in Banking Exams
    • Facebook IPO
  • Accounting fundamentals (700+)
  • Asset Management Tutorial (200+)
  • Banking (44+)
  • Corporate Finance Basics (373+)
  • Credit Research Fundamentals (6+)
  • Economics (88+)
  • Finance Formula (386+)
  • Financial Modeling in Excel (17+)
  • Investment Banking Careers (29+)
  • Trading for dummies (69+)
  • valuation basics (27+)
  • Insurance Resources (14+)
  • Top Finance Books (7+)
Finance Blog Courses
  • Investment Banking Course
  • Mergers & Acquisition Course
  • Financial Modeling Course

Horizontal Merger

By Madhuri ThakurMadhuri Thakur

Horizontal Merger

Introduction to Horizontal Merger

In the corporate world, the term “horizontal merger” refers to the union of two entities that are either operating in the same industry or in a similar industry as competitors. In other words, it means that a financially stronger company buys out a financially weaker competitor or they mutually reach an agreement to combine their forces to create a new merged entity. A horizontal merger is also known as horizontal integration.

Explanation

A horizontal merger is a business strategy that is used by companies that intend to grow inorganically by acquiring other smaller entities. Typically, horizontal mergers occur in highly concentrated industries where the number of operating firms are fairly low and so such mergers can be favorable due to synergies. Eventually, the combining entities enjoy the benefits of economies of scale as both the companies prior to the merger were operating as a competitor on the same stage of the supply chain. In the long-run, these merged entities are also able to grow their market share, reduce their operating costs, and increase their product offering to the customers without any additional capital investment.

Examples of Horizontal Merger

There are several examples of horizontal merger and some of the major ones have been discussed below:

  • HP and Compaq: In the year 2001, HP and Compaq agreed to join forces in a stock-for-stock merger with an exchange ratio of 0.63 HP shares for each Compaq share, which was valued at ~$25 billion. Post-merger the new entity’s shareholding was 64% HP and 36% Compaq and the merged entity was valued at $87 billion. It became the global technology leader that offered one of the most comprehensive sets of IT products and services.
  • Facebook and Instagram: In the year 2012, Facebook acquired Instagram at a purchase value of $1 billion. Both the entities operated in the social media industry and offered similar products as part of their photo-sharing services. However, Facebook intended to further bolster its market position in the social media space and acquisition of Instagram exactly fitted in its scheme of plan. The merger eventually helped Facebook in increasing its market share, eliminating competition, and gaining access to a wider audience.
  • Pixar and Walt Disney: In the year 2006, Walt Disney Company acquired Pixar Animation Studios for $7.4 billion as part of its horizontal integration strategy. Basically, despite being one of the entertainment giants, Disney was struggling with its creativity and as such was facing market saturation with its current operations. In such a scenario, Pixar with its cutting-edge technology and an innovative vision for digitally animated movies came as a breath of fresh air.

Reasons for Horizontal Merger

Two companies agree to a horizontal merger with the sole intention to boost the intrinsic value. Often a successful horizontal merger would help the combining companies to leverage each other’s technical expertise and business know-how, which eventually drive the entity’s value such that the intrinsic value of the merged would be more than the intrinsic value of the individual companies under their independent ownership. Effectively, the underlying principle of a horizontal merger is that if the intrinsic value of the two combining companies is X and Y respectively, then the intrinsic value of the merged entity should be greater than (X + Y).

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Difference between Horizontal Merger and Vertical Merger

Some of the major differences between a horizontal merger and vertical merger are as follows:

  • The horizontal merger takes place between two companies that have offer similar products and operates at the same level of the value chain, while vertical merger refers to the combination of two companies that operate at different stages of the value chain.
  • Horizontal merger is focused on increase of scale of production and eventually grow the size of the business, while vertical merger is often aimed at integrating downstream and upstream companies to develop better operational efficiency.
  • Horizontal merger helps in eliminating competition between companies and extending market share, while vertical merger helps in reducing the cost of production and controlling other operational wastages.
  • Horizontal merger offers the benefits of synergy but not self-sufficiency, while vertical merger offers the completed package of synergy along with self-sufficiency.
  • A horizontal merger helps in acquiring more control over a certain market, while vertical merger helps in gaining more control over the supply chain.

Advantages and Disadvantages

Some of the major advantages and disadvantages are as follows:

All in One Financial Analyst Bundle(250+ Courses, 40+ Projects)
Financial ModelingInvestment BankingUS GAAPCFA-Level 1 & 2
Equity ResearchM & A ModelingPrivate Equity ModelingForex Trading
Price
View Courses
250+ Online Courses | 40+ Projects | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (86,328 ratings)

Advantages

Some of the major advantages are as follows:

  • It helps in eliminating competition in the industry by combining with one of the competitors.
  • Combination of two entities that operate in the same market results in increased market share.
  • Economies of scale given that both the entities deal in similar products, which results in a lower cost of production.
  • The combined entity has a wider and diversified geographical presence.
  • Exchange of technical expertise and business know-how among combining entities helps in realizing economies of scope.
  • Both entities are able to leverage the shared talent pool and resources.

Disadvantages

Some of the major disadvantages are as follows:

  • Merging two entities with a fairly different cultural background can be a difficult task.
  • The difference in the management style of the combining entities can be a hindrance to a healthy working relationship.
  • In some cases, the combining entities are unable to achieve synergies, which eventually leads to deterioration of the overall intrinsic value as against the expected increased value.
  • In case some of the largest players of an industry combine force, then it can lead to a monopoly market condition, which is never a desirable market situation. In fact, there might be legal repercussions if such mergers take place.

Conclusion

So, it can be seen that horizontal mergers can be very beneficial for the combining entities as it can help in widening their reach, eliminating competition, gaining institutional knowledge, and reducing the costs of production while increasing the top line. So, by now you have good knowledge about the horizontal merger and its importance in corporate parlance.

Recommended Articles

This is a guide to Horizontal Merger. Here we discuss an introduction to Horizontal Merger with an explanation, examples, reason, the difference between, advantages and disadvantages for the same. You can also go through our other related articles to learn more –

  1. Horizontal Integration Example.
  2. Merger
  3. Vertical Merger
  4. Banks in Liechtenstein
Popular Course in this category
Investment Banking Course (123 Courses, 25+ Projects)
  123 Online Courses |  25 Hands-on Projects |   600+ Hours |  Verifiable Certificate of Completion
4.9
Price

View Course

Related Courses

Mergers & Acquisition Course (with M&A Projects)4.9
Financial Modeling Course (7 Courses, 14 Projects)4.8
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

ISO 10004:2018 & ISO 9001:2015 Certified

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Financial Modeling Course

3 Statement Model Creation, Revenue Forecasting, Supporting Schedule Building, & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more