What Is a Horizontal Acquisition?

What Is a Horizontal Acquisition?

Let me explain what a horizontal acquisition is. It happens when one company acquires another that's in the same industry and at the same stage of production. The resulting entity often gains advantages like greater market share or better scalability compared to the original companies operating separately. As the acquirer, you expand your capacity, but your core business operations stay the same—unlike deals that create an entirely new kind of company.

Key Takeaways

To sum it up quickly, a horizontal acquisition is when one company takes over a similar one in the same industry. Your business operations expand but don't fundamentally change. Typically, both companies produce similar products with matching production schedules. This differs from a vertical acquisition, where companies in the same industry but at different production stages combine.

Understanding Horizontal Acquisitions

Mergers and acquisitions, or M&A, are standard in business, involving the combination of companies or their assets into one unit. Mergers consolidate two or more companies into a single entity, while acquisitions happen when one company buys and takes over another.

A horizontal acquisition, also known as horizontal integration, is a specific M&A strategy. It occurs between companies in the same industry. You might pursue this for reasons like reducing competition, diversifying products, creating new ones, expanding your business, entering new markets, or gaining market share.

In this setup, both the acquiring company and the target produce similar goods or services and are at the same production cycle point. This allows the new entity to increase production capacity and improve profits and revenue. If they were at different stages, the equipment might not align as well for the acquirer.

After the acquisition, the target company's identity usually dissolves, becoming part of the acquirer. Operations don't change post-deal. If the target is public, its shares are dissolved, and shareholders might get cash or stock in your company.

Remember, while a horizontal acquisition expands production, it doesn't mean a complete pivot for your company.

Advantages and Disadvantages of Horizontal Acquisitions

Horizontal acquisitions can benefit the involved companies, but they come with drawbacks. I'll outline the key pros and cons.

On the advantages side, executing one takes significant time and research to ensure it benefits everyone. When successful, you gain increased market share and a larger customer base, access to new markets and product lines, reduced competition and production costs, the adoption of a recognized brand if the target has one, and a boost in revenue and profits.

However, merging similar companies isn't always straightforward. Antitrust laws prevent reduced competition, especially monopolies, as concentrated power lets a few companies raise prices, harming consumers with limited choices.

Integrating companies can be tough if cultures differ. Target employees might struggle with new processes, requiring extensive training for a smooth transition. Also, the larger company may lose flexibility, struggling to adapt quickly to market changes, consumer preferences, or economic shifts compared to smaller entities.

Horizontal Acquisition vs. Vertical Acquisition

Acquisitions vary, some targeting equipment or control at different production cycle points. A vertical acquisition consolidates companies in the same industry, like food or energy, but at different production stages. Unlike horizontal, it gives the acquirer more control over the entire process.

There are backward vertical acquisitions, where you obtain upstream equipment further from the end client, and forward ones, accessing downstream equipment closer to the consumer. For example, an energy company buying a grid management firm is vertical, as it brings the product closer to users.

Examples of Horizontal Acquisitions

Consider a hypothetical: two rival energy companies serving the same area negotiate a merger where Company A buys Company B. This is horizontal due to the same industry and production schedule.

In the real world, AT&T and Discovery merged Discovery with WarnerMedia in 2022, forming Warner Bros. Discovery. Disney merged with 21st Century Fox in 2019 for entertainment services. Northwest Airlines merged with Delta in 2008. Exxon and Mobil formed ExxonMobil in 1999.

What Are the Benefits of a Horizontal Acquisition?

These acquisitions let you eliminate competition, cut production costs, boost profits, and grow your business. You also access new markets, adopt new product lines and brands, and increase market share.

What's the Difference Between a Merger and an Acquisition?

Both consolidate companies, but a merger combines similar-sized ones amicably into one. An acquisition is one company buying another, which can be friendly or hostile if the target resists.

How Does a Horizontal Acquisition Differ From a Vertical Acquisition?

Both are in the same industry, but horizontal involves same-stage companies, while vertical connects different stages, accessing equipment closer to or further from the end client.

The Bottom Line

Horizontal acquisitions are one form of M&A, occurring between similar companies at the same production stage. They help gain market share, expand products, and reduce competition. However, they take time due to regulatory concerns about excessive producer power harming consumers.