Horizontal Integration: Definition, Synergies, Examples
- Definition of Horizontal Integration
- How does Horizontal Integration Work?
- Reasons for a Company to Integrate Horizontally
- Real Industry Examples for Horizontal Integration
- Synergies of Horizontal Integration
Definition of Horizontal Integration
Horizontal Integration is where two companies in the same industry merge together. Competitor companies in the same industry get together to achieve economies of scale and higher market share. Horizontal Integration occurs within the same industry so that the entities involved can enhance their competencies together.
Horizontal integration optimizes the consolidated strategic business activities and processes. The company will be able to explore new market segments, achieve economies of scale, eliminate competition, increase efficiency, and optimize production capabilities as a result of horizontal integration.
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 will be a disadvantage to the consumer’s point of view.
How does Horizontal Integration Work?
The company can proceed with Horizontal Integration in a form of mergers and acquisitions. A merger is where two companies combine to move ahead as one company. An acquisition is where one company purchases another company to expand its business. These will help the company to strengthen its position in the industry.
Reasons for a Company to Integrate Horizontally
Below are the reasons for a Company to decide on Horizontal Integration
- Obtain a larger customer base
- Improve the pricing power
- Reduce the employment cost by merging two entities
- Obtain economies of scale
- Increase market share
- Expand the business
- Improve the cost efficiencies
- Better position the products of the combined entity
- Eliminate the competition
Real Industry Examples for Horizontal Integration
1. Daimler-Benz Purchased Chrysler Corporation
In 1998, the German automobile company Daimler-Benz, the producer of the world-famous luxury car brand Mercedes-Benz, announces a merger with the United States based Car Maker Chrysler Corporation.
The company was renamed DaimlerChrysler upon acquiring. The merger is intended to safeguard the long-term competitiveness of the companies involved. This combination was expected to boost competitiveness and strengthen earning power.
2. Mittal Steel’s Acquisition of Arcelor
One of the world’s largest steel producers Mittal Steel Company had merged with Arcelor. Arcelor was also a large-scale steel manufacturing corporation.
Mittal Steel announced a hostile bid for Arcelor. The deal was valued at $38.3 billion. But there was oppose from French, Luxembourg, and Spanish Governments for this takeover.
After series of discussions and activities, the Arcelor board decided to go ahead with the merger with Mittal Steel in 2006. The two companies merged to become the world’s largest steel company ArcelorMittal which occupied the number one position in North America, South America, Europe, and Africa. 10% of the world’s steel production is handled by the combined Arcelor–Mittal. The company controls a significant portion of the global steel business after this combination.
More information: SpringerLink
3. The Disney-Pixar Merger
The Walt Disney Company was founded in 1923 by brothers Walt and Roy Disney. It is one of the largest media and entertainment corporations in the world. Pixar was a movie production company mainly in computer-animated filmmaking.
Robert A. Iger, President and Chief Executive Officer of The Walt Disney Company, announced in 2006 that Disney has agreed to acquire computer animation leader Pixar for $7.4 billion.
This acquisition combines Pixar’s creative and technological resources with Disney’s unparalleled portfolio of world-class family entertainment, characters, theme parks, and other franchises.
This was a successful integration and produced many movies together.
4. British Petroleum Company becomes One of World’s Seven Oil and Gas Supermajors
British petrochemical corporation merged with the Amoco Corporation, one of the largest American chemical and oil company in 1998. Both companies are actively involved in international oil exploration, petroleum, and petrochemical production.
After the merger, the British petrochemical corporation became one of the world’s largest oil companies. British Petroleum also acquired/merged with multiple oil companies such as Britoil PLC, Standard Oil Company, and Amoco to gain economies of scale and global market power.
More information: Britannica
5. Tata Steel Acquired Corus Group in 2007
Tata Steel (in India) was established in 1907 which was the largest steel producer. Corus was formed through the merger of British Steel and Koninklijke Hoogovens, which was an international steel and metals manufacturer.
Corus was acquired by Tata Group in 2007. This was a £6.2 billion (US$12 billion) acquisition.
After the acquisition, Mr. Ratan Tata, Chairman of Tata Steel and Corus, said that this is a major step forward in the company’s global strategy. He had a strong belief that two companies will share a global vision for the business.
The combined company had a crude steel production of around 27 million tonnes in 2007. The combined company was the world’s fifth-largest steel producer with a major presence in Europe as well as Asia.
6. Hewlett-Packard and Compaq agree to Merge to be the Global Technology Leader
Compaq was an American information technology company founded in 1982 that developed, sold, and supported computers and related products and services. Hewlett-Packard provided a wide variety of hardware components, as well as software and related services to consumers and businesses.
Both companies merged to create an $87 billion global technology leader. The merger was expected to generate cost synergies of approximately $2.0 billion. Companies aimed to have the industry’s most complete set of IT products and services for both businesses and consumers.
The company expected that the new HP would be the #1 global player in servers, imaging & printing, and access devices. Also expected that new HP would be the Top 3 player in IT services, storage, and management software. The consolidated aim of the combined entity was to be the global technology leader using economies of scale.
Synergies of Horizontal Integration
Horizontal integration is a competitive strategy where business entities operating at the value chain level and within the same industry combined to gain synergies.
Following are the synergies that companies can obtain through horizontal integration,
- Improve the market power
- Obtain economies of scale
- Increase the market share
- Expand the business
- Introduce innovative products
- Revamp existing products from the combined knowledge
- Increase production efficiency
- Optimize the cost from the combination of business operations
- cost synergies in marketing, research and development (R&D), and distribution
- Eliminate competition
- Improve product and service quality from the combined experience
- Improve product uniqueness
- Reduce business risks
- Enter to new markets and geographies
- Vertical Integration
- Definition of Vertical Integration
- Real Industry Examples for Vertical Integration
- Advantages and Disadvantages of Vertical Integration
- Definition of Backward Integration
- Definition of Forward Integration
- Differences between Forward Integration and Backward Integration