Question

Pick one example of horizontal or vertical acquisition. What is the objective? Based on your understanding, why it succeeds or fails?

Answer 1

Benefits of Horizontal Integration

There are numerous benefits to undergoing horizontal integration.

Larger Market Share

The most obvious benefit is an increased market share or market power. When the two companies merge, they also combine the product base, technology, and services that are available on the market. With more products under one name, the new company can increase its foothold among consumers.

Bigger Base of Customers

Because the two companies may be operating in the same industry, they may not necessarily have the same consumer base. By merging the two companies into one, the new organization now has access to a larger base of customers.

Increased Revenue

By increasing its customer base, the new company can now boost its revenue. It's typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.

Additional Benefits

Here are a few other advantages of horizontal integration:

• Reducing competition
• Increasing other synergies such as marketing
• Creating economies of scale and economies of scope
• Reducing other production costs

Horizontal integration should not be confused with lateral integration, which is the merger of two companies that sell related goods but do not compete with each other.

Drawbacks of Horizontal Integration

As with any process, some disadvantages must be considered along with the benefits.

Regulatory Scrutiny

The first and most troublesome is the level of scrutiny this kind of strategy faces, especially from government agencies. Big mergers like these are the reason why antitrust laws are in place. These laws prevent big corporations from mergers and acquisitions that would narrow the competitive market and possibly create a monopoly. This is seen as being a predatory act, giving one player dominance in the market. It creates the idea that the larger, newly formed corporation may take advantage of consumers with higher prices and narrow product/service choices.

Additional Cons

Other cons of horizontal integration include:

• Stunting economic growth of the new enterprise.
• Reduced flexibility: This happens because the company is now a larger organization. The addition of more personnel and processes means the need for more transparency and, therefore, more accountability and red tape.
• Destroying value rather than creating it: This happens because the synergies never materialize despite the costs of the horizontal integration.