The business combinations after horizontal integration may lead to industry consolidation. This will create an oligopolistic or monopolistic situation in the industry. The eliminated competition might lead to increase prices for products. This illustrates one of the ways that a merger can benefit both companies.
- The objective of the acquisition was to expand the business portfolio of the company.
- Horizontally integrated firms improve market share by the expansion of business activities, cost synergies in marketing, combined product base, and shared technology, among others.
- Horizontal integration strategy to diversify into different verticals.
- Both companies gained learning from the R&D expertise of each other.
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. The customers could be at the losing end if the company as a result of this kind of merger utilizes its monopoly power to keep demand for its products inelastic. For example, Over-the-top content platform behemoth ‘Netflix’ started off by selling DVDs and then offering streaming services in 2007.
Horizontal Integration Definition
This is, usually, the result of an inability to forge synergies as foreseen in the initial stages. Just two companies being in the same space or having some commonality may not be enough for the integration to produce the desired results. While these can be overcome with effort and in time, tin number sample these can cause minor, if not major, setbacks. The operational challenges in managing a bigger organisation that gets formed by combining two companies could slow down the pace of growth. There is lesser flexibility and speed in taking decisions till such time things settle down.
It’s basically when a company strategizes so much that they’re the ones who benefit the most from it. Because they have so many stores set up, they would be able to literally eliminate the competition. 2) Companies hire specific M&A consultants who can help out with chang management. But it might also increase the engagement level and motivation level of several people. What if you boss was not good to you but because of the horizontal integration you got a new boss who is excellent in his work?
Amazon - Horizontal Integration example
The result of industry consolidation is fewer companies operating in the industry and less intense competition. The merger also granted stakeholders 1.05 shares of UAL stock for each share they held in Continental Airlines. Once the shares transferred over, the company agreed to change its name to United Continental Holdings.
- ACC Cement expanded its coverage in the eastern part of India by acquiring Damodar Cement in 2005.
- The company has those competencies, capabilities, resources, or skills that its competitors either don’t have or have a shortage of them.
- The structure of this merger was stock-to-stock including exchange ratio i.e. 0.63 of HP share on every Compaq share.
- It’s because of the larger customer base, increasing sales, and market share.
- Horizontal integration occurs when two businesses merge that produce goods or services at the same level in the value chain.
The rationale behind the move was to create a trans-Atlantic automobile-making behemoth. By 2007, Daimler Benz sold Chrysler to the Cerberus Capital Management firm, for just $7 billion. The reason for the failure was a perfect corporate cultural incompetency between the German-based Daimler and US-based Chrysler. One of the biggest drawbacks of horizontal integration could be the incompatibility between the cultures of the amalgamated companies. This may involve a mismatch in which the companies were run before the integration. Employer-Employee relationship, treatment of labor unions, approach to compensation, and promotions are some of the reasons that could snowball into a cultural mismatch.
Horizontal Integration Example : Facebook Acquiring Instagram
Another good example would consist in the merging of two consultancy and trading companies. The first one with only 125 employees is going to merge with the second one with more than employees. The company from Europe is receiving a high number of projects for UAE, but in order to develop them, they need more financial and human resources.
This deal was supposed to make IBM a top hybrid cloud provider in the world. Through this deal, Red Hat supported IBM to enlarge its customer base of organizations that are still away from cloud computing. Different companies or organizations look for growth opportunities by adopting integration strategy i.e. vertical or horizontal integration with other organizations or companies. This is profitable when they are to start business in different countries or locations of which you do not have sufficient knowledge. Companies using Horizontal Integration get access to information on clients, the market and the complete environment in which the company is operating. Companies that use Horizontal Integration want to achieve the positioning of the company at the level of territorial expansion.
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. This merger resulted in a global technology leader worth the US $87 billion that offers the most extensive IT products and services for customers and businesses. 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: Explanation with Real Industry Examples
To gain production efficiencies by producing more units at central manufacturing facilities. One entity builds lower-income housing, while the other constructs high-end homes near golf courses. Standard Oil, which was seen as a powerful conglomerate brooking no competition, was split up into over 30 competing companies in an anti-trust case. There is a third type of vertical integration, called balanced integration, which is a judicious mix of backward and forward integration strategies. An HR system is referred to as a horizontally integrated system if it’s different components, like the system, the tools, the process etc. are in synchronization.
The whole approach of horizontal integration is based on the synergy between the companies involved. The success of horizontal integration depends on factors such as synergy between products and services, expertise in terms of manpower, and the culture of one company with another company. Horizontal integration can be distinguished from conglomerate integration by taking into account the direction. Horizontal mergers of related companies occur within the same industry or line of products so that the entities involved can exploit their competencies.
Marriot bought Starwood Hotels in 2016 and became the world’s largest hotel and Restaurant Company. Marriot has the advantage of being a luxury brand and Starwood had a strong global presence. The objective of the acquisition was to expand the business portfolio of the company.
Global Milk brands in 2020 – What makes them successful?
The only difference is that now, they are owned by Facebook and share in the profits. Horizontal integration can be an effective strategy https://1investing.in/ to increase profits for a business. Horizontal integration is similar to this in that a company , wants to seek out different deals.
Horizontal integration of companies within the same industry attracts businesses that target to reach a broader market or offer more products/services. It can lead to product diversification, increased company size, narrow competition, and economies of scale. Economies of scale, competitive edge, increased market share, and business expansion. Businesses in strategic alliances target outcomes that provide more resources, market, competence, and efficiency. The two amalgamated entities should be better positioned to realize more revenue than they would have when operating independently.
Even negative synergies can be the outcome and the value of the whole business may reduce. Possibilities are there of overlapping of personnel or products that can be expensive. Also, developing a combined corporate culture may be difficult or difficulty in running the new firm may occur due to the size of the new firm. These advantages of Horizontal Integration can lead to the growth of partnerships in R&D, production, offering of products and services and more. Marriott and Starwood were two renowned hotel chains all across the globe. In 2016, Marriot acquired Starwood in a deal wherein the Starwood shareholders were given 0.8 shares of the merged entity against every Starwood share they held (0.8x acquisition ratio).