What is a Horizontal Acquisition?
A horizontal acquisition, also known as a horizontal merger or horizontal integration, is a strategy that involves one or more organizations taking over or merging with another that operates in the same industry and is in the same stage of production.
When the integration occurs, it’s generally to enable formerly competitive companies to form either a single-rule organization (a monopoly) or an organization where a few firms exercise power (an oligopoly). Therefore, when horizontal acquisitions occur, they form horizontal monopolies and horizontal oligopolies.
The Benefits of Horizontal Acquisition
There are a variety of advantages to horizontal acquisitions. The foremost benefit – and the primary goal for most of the acquisitions – is gaining the goods and services of another company, allowing one company to compile and bolster the basket of assets they sell to consumers. Increasing the range and scope of goods and services a company can offer allows the newly-formed organization to pool customers and to draw in new consumers as well. This, in turn, generally leads to greater revenue.
The other primary benefit is improved distribution, specifically if the merged companies maintain established customer bases in different geographical locations. Broadening the range of territories that can be covered often leads to new marketing and revenue opportunities, as well as increasing the likelihood that new consumers will be drawn in.
A horizontal acquisition also reduces competition and helps to increase market share. While not all horizontal mergers are conducted between competing companies, because the nature of the acquisition means that the companies operate in the same general market space, competition is almost always present and is at least reduced when the two or more companies combine.
A note of warning though, reducing competition, especially in the event that a monopoly is formed, can lead to antitrust legislation being activated.
Antitrust Legislation (Monopolies)
Antitrust laws, in a broad sense, are designed to prevent businesses from using dirty tactics to form monopolies and control large portions of the market. Basically, these laws attempt to keep a relatively level playing field, maintaining a free market economy by preventing one or more large businesses from dominating the market.
Certain trading and financial actions, as well as operational practices, are prohibited by various antitrust laws, ensuring that companies play fair when attempting to outperform their competition.
Antitrust laws can be tricky, and it’s not always clear when a company violates them. In any instance where the government believes unfair tactics may have been used, charges are filed, and the courts are used to determine what – if any – rules have been broken. In most cases, courts use the “law of reason” to determine antitrust violations, meaning they look at the impact on the market as a whole and the effect that one company’s actions have on it and on the sector they operate in.
Horizontal acquisitions can be a great financial and tactical move for competing companies operating in the same market space. As long as the newly formed companies play fair when looking to minimize their competition, the mergers are largely successful.
We hope you enjoyed reading CFI’s explanation of horizontal acquisitions. CFI is the official provider of the global Financial Modeling & Valuation Analyst certification program, designed to help anyone become a world-class financial analyst. The following CFI resources will be helpful in furthering your financial education: