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Horizontal Merger

Horizontal Merger – Meaning, Examples, Guidelines, MCQs, Advantages, Disadvantages | Financial Management

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Horizontal Merger Meaning

A horizontal merger refers to a business consolidation between two companies operating in the same industry and at the same level of production or supply chain. The purpose is to combine two competitors or businesses that offer the same products or services.

Typically, horizontal mergers are designed to increase market share, reduce competition, or gain a competitive edge. The companies will benefit from pooling their resources, sharing expertise, reducing costs, and possibly increasing their market share by merging.

A horizontal merger must be closely monitored by regulatory authorities, including antitrust or competition commissions, to make sure it does not result in anti-competitive behavior or harms consumers. The regulatory authorities may challenge or even block a horizontal merger if it decreases market competition significantly in order to prevent monopolies.

Generally, a horizontal merger involves two companies operating in the same industry merging their operations and resources to achieve various business objectives and potentially gain a stronger market position.

Horizontal Merger Examples

Some of the examples of Horizontal Mergers are as follows:

  • Exxon and Mobil:

Founded in 1999, ExxonMobil is one of the largest publicly traded oil and gas companies in the world. Exxon and Mobil were two major oil companies that merged in 1999. Due to the fact that both companies operated in the same industry—exploration, production, refining, and marketing—this merger was considered a horizontal integration.

In addition to achieving economies of scale, consolidating their operations and assets, and strengthening their competitive position in the global energy market, Exxon and Mobil sought to combine to reduce costs.

  • Daimler-Benz and Chrysler:

In 1998, the German car manufacturer Daimler-Benz merged with Chrysler Corporation to form DaimlerChrysler. By combining their resources, expertise, and market presence, the two companies were able to create a global automotive powerhouse. This merger was a horizontal integration within the automotive industry. Both companies were involved in designing, manufacturing, and selling automobiles.

As a result of cultural differences and operational difficulties, the merger failed in 2007, leading to its dissolution.

  • Walt Disney Company and 21st Century Fox:

The Walt Disney Company acquired 21st Century Fox’s entertainment assets, including its movie and television studios, cable networks, and other properties, in 2019. Through this horizontal merger, two major entertainment conglomerates operated in similar markets were brought together.

Disney gained access to valuable intellectual property, and distribution channels, and expanded its content library as a result of the acquisition.

  • Time Warner and AT&T:

A media and entertainment company that owns Warner Bros., HBO, and CNN, AT&T acquired Time Warner in 2018. A telecommunications company and a media content provider were horizontally integrated through this merger.

The merger aimed to create a vertically integrated company that could offer consumers a variety of entertainment options through a variety of platforms by combining AT&T’s distribution capabilities with Time Warner’s vast content library.

A horizontal merger occurs when two companies operating in the same industry merge in order to maximize synergies, expand market share, diversify products, and gain competitive advantage. Each merger, however, is unique and may have a different strategic objective based on the companies involved and the market conditions.

Horizontal Merger Guidelines

The horizontal merger guidelines refer to the principles and criteria used by regulatory agencies to assess and evaluate the impact of horizontal mergers on market competition. As a result, mergers do not have to result in anticompetitive behavior, harm consumer interests, or result in a disproportionate concentration of market power.

Below are a few of the key aspects covered by horizontal merger guidelines:

Horizontal Merger Guidelines

  • Market Definition:

An evaluation of a horizontal merger begins with defining the relevant market. This includes identifying the products and services offered by the merging companies as well as their geographic scope. Regulators can use it to assess the potential impact of the merger on competition within that specific market.

  • Market Concentration:

Regulatory authorities analyze market concentration to determine whether a merged entity can exercise market power and limit competition. Market concentration can be measured using a variety of metrics, including the Herfindahl-Hirschman Index (HHI) or concentration ratios. Increased concentration levels may lead to a reduction in competition, price hikes, and diminished consumer choices.

  • Entry Barriers:

An evaluation of entry barriers is essential because it mitigates concerns about reduced competition from a merger if entry barriers are low. A high level of entry barriers, however, may indicate a higher risk of anticompetitive effects, such as substantial capital requirements, regulatory hurdles, or access to distribution channels.

  • Competitive Effects:

An assessment of the merger’s competitive effects includes pricing, output levels, product quality, innovation, and consumer choice. On the other hand, mergers that foster efficiency, innovation, or consumer benefits are often viewed more favorably. It may raise concerns if the merger could reduce competition substantially.

  • Market Power and Dominance:

Authorities examine whether the merged entity will gain significant market power or become dominant. Having dominance may help a firm raise prices, lower quality, or prevent competitors from entering the market. By identifying whether the merger will create or strengthen such dominance, the guidelines can be used to identify its negative impact.

  • Efficiencies and Benefits:

This merger may result in efficiencies and benefits. As long as the merger leads to cost savings, economies of scale, technological advancements, improved product offerings, or enhanced innovation, it will be considered a positive outcome that outweighs its potential anti-competitive effects.

  • Divestitures and Remedies:

If authorities suspect a merger will negatively impact competition, they may require remedies or divestitures to address that concern. In order to maintain or restore competition in the market, the merged entity could be required to behave in a certain way, divest certain assets, or license intellectual property rights to competitors.

By using horizontal merger guidelines, regulatory authorities can assess mergers in a structured way and make informed decisions based on their potential impact on consumer welfare and competition. According to the legal frameworks and competition policies in place in each jurisdiction, specific guidelines and thresholds may vary.

Advantages and Disadvantages of Horizontal Merger

A horizontal merger can have both advantages and disadvantages for the companies involved. Let’s explore these advantages and disadvantages in more detail:

Advantages of Horizontal Mergers:

Advantages of Horizontal Mergers

  • Economies of scale:

A horizontal merger offers the potential for economic benefits. Through bulk purchasing, streamlined production processes, and shared distribution networks, companies can reduce costs by combining operations and resources. Cost savings, efficiency, and profitability can all be achieved by utilizing economies of scale.

  • Market Power:

A horizontal merger can increase market power and strengthen competitiveness. Companies can increase their market share by consolidating with a competitor, which can lead to higher pricing, improved negotiation leverage with suppliers, and a greater influence on industry dynamics.

  • Expansion of Product Offering:

Merging with a company in the same industry allows you to offer new products or services. In addition to attracting a wider customer base, the merger can increase cross-selling opportunities by leveraging each company’s strengths. By combining the strengths of both companies, the merged entity will be able to offer a more appealing value proposition to customers.

  • Access to New Markets:

The ability to penetrate new geographic markets or segments of the customer base can be gained through horizontal mergers. When companies combine forces, their distribution networks and customer bases can be leveraged to reach new markets or penetrate previously untapped ones.

  • Synergies and Resource Sharing:

When companies merge, they can pool resources, expertise, and capabilities, leading to increased innovation, improved research and development efforts, and better-shared practices. By collaborating and exchanging knowledge, merging entities can improve operational efficiency and foster a culture of continuous improvement.

Disadvantages of Horizontal Mergers:

Disadvantages of Horizontal Mergers

  • Reduced Competition:

In horizontal mergers, competition can be reduced, which is a major concern. A merger between two competitors may reduce consumer choice and reduce the incentive to offer competitive pricing or innovate for consumers. Consumer interests and anti-competitive behavior are carefully scrutinized by regulatory authorities when horizontal mergers occur.

  • Integration Challenges:

It is often challenging to integrate two companies in the same industry when they are merging. A merger’s success is often dependent on effective integration planning and execution, which can lead to internal conflicts and difficulty in harmonizing operations. Various organizational cultures, management styles, and processes can make it difficult to harmonize operations.

  • Increased Market Concentration:

Horizontal mergers can result in a significant share of market control by a few dominant players. In addition to limiting competition, this concentration may give rise to market power for the merged entity, which can adversely impact pricing, innovation, and quality.

  • Regulatory Scrutiny:

Companies must comply with antitrust or competition laws when they merge horizontally. It can take time and money to obtain regulatory approvals, and they may involve conditions or remedies to address competition concerns, which can affect the timeline and the potential benefits of the merger.

  • Cultural Differences:

Merging companies may have different cultures, values, and operating philosophies. Employee dissatisfaction or resistance can result from cultural clashes, which can hinder integration efforts, hinder effective communication, and impede effective communication. The merged entity’s success depends on managing cultural differences and cultivating a harmonious work environment.

A horizontal merger can have advantages and disadvantages that vary depending on the specific circumstances, industry dynamics, and how it is executed. In order to maximize the benefits of a horizontal merger and minimize its challenges, proper due diligence, strategic planning, and effective post-merger integration are essential.

Horizontal Merger Definition Economics

Economically, a horizontal merger entails the consolidation or combination of two or more companies that operate within the same industry and in the same supply chain. In other words, it involves the merger of businesses with similar products or services offered by competitors or similar businesses.

The primary objective of horizontal mergers is to increase market share, achieve economies of scale, reduce competition, and gain a competitive advantage. Companies can increase their market power by merging, pooling their resources, sharing expertise, and reducing costs.

In economic terms, horizontal mergers can affect market dynamics. If they lead to a significant reduction in competition, they might result in market concentration, which can negatively impact consumer welfare. This can lead to higher prices, fewer products to choose from, fewer incentives for innovation, and lower quality products.

In order to assess the potential impact of horizontal mergers on market competition, economists and regulatory authorities closely examine them. It involves analyzing factors such as market concentration, market power, entry barriers, competitive effects, and potential efficiencies resulting from the merger. By analyzing this data, consumers and competition can be informed about whether the merger will enhance or impede competition.

Basically, horizontal mergers in economics refer to the consolidation of companies within the same industry or production chain, with potential implications for market competition, consumer welfare, and economic efficiency.

How do horizontal mergers work?

In a horizontal merger, two or more companies in the same industry are merged. The process begins by determining the strategic reasons for the merger, for example, expanding the market or reducing costs. In order to determine the terms of the deal and conduct due diligence, the companies conduct a preliminary analysis to assess the feasibility and potential benefits.

Regulatory approval may be necessary to ensure compliance with antitrust laws and evaluate the impact on competition. Upon approval, the companies align organizational structures, processes, and resources in preparation for integration planning and implementation. In the post-merger integration phase, synergies are captured, operations are optimized, and the integration plan is executed.

Each merger is unique, but achieving desired outcomes and maximizing the potential benefits require careful planning, due diligence, and successful execution.

What was a successful horizontal merger?

The merger between American Airlines and US Airways, completed in 2013, is one example of a successful horizontal merger. US Airways and American Airlines were major players in the U.S. airline industry at that time, and the merger created the world’s largest airline.

For several reasons, the merger was successful. A merged company achieved significant economies of scale by consolidating operations, fleets, and routes, reducing costs, improving operational efficiency, and improving profitability through consolidation. In addition to expanding the combined airline’s network, the merger enabled it to offer passengers a broader selection of destinations.

A merger also strengthened the merged entity’s competitive position. In an industry that had already seen considerable consolidation, American Airlines and US Airways were better positioned to compete with other major airlines after combining their market shares and resources. Increased scale and market power enabled the merged airline to reduce pricing pressure, improve customer service, and invest more in technology.

Furthermore, the integration process was relatively smooth. As part of the integration process, both airlines’ management teams addressed potential challenges such as combining different corporate cultures and aligning operational systems to address potential challenges. By integrating, they achieved synergies and minimized disruptions to customer service.

US Airways and American Airlines’ horizontal merger produced a stronger, more competitive airline that provided its customers with expanded services and benefits and achieved improved financial performance.

What is the difference between a vertical and horizontal merger?

A horizontal merger differs from a vertical merger primarily in the relationship between the merging companies and their position within the supply chain. A horizontal merger occurs when two or more companies operating in the same industry and at the same level of the supply chain combine their operations. Typically, these companies offer similar products or services to their customers.

A vertical merger, on the other hand, involves the consolidation of companies that are involved in different stages of the supply chain, such as production or distribution. The merging entities participate in different but related stages of the supply chain. Horizontal mergers aim to gain a competitive advantage within an industry, achieve economies of scale, reduce competition, or expand market share.

Through the integration of different stages of production or distribution, a vertical merger improves coordination, efficiency, and control over the supply chain. A horizontal merger may reduce competition and increase market concentration, while a vertical merger may have indirect effects on competition and can raise concerns if the merged entity is able to exercise market power or engage in anticompetitive behavior.

Regulatory scrutiny is applied to both horizontal and vertical mergers, with horizontal mergers typically being scrutinized more intensely because of their direct competitive impact.

What outcomes do horizontal merger and acquisition strategies intend?

A horizontal merger and acquisition (M&A) strategy is aimed at expanding market share by combining the operations of two or more companies within the same industry. As a result, the merged company will gain a greater share of the market, increasing its competitiveness and bargaining power. In addition, horizontal M&A strategies aim to save money and achieve synergies.

Furthermore, horizontal M&A strategies aim to enhance the competitive position of the companies involved by streamlining processes and streamlining operations. By eliminating redundancies and optimizing operations, the merged entity can streamline processes and reduce costs.

By leveraging complementary strengths and capabilities, such as expanding product offerings or accessing new markets, the merged entity can strengthen its market position. As well as entering new markets or expanding existing ones, another outcome is planned.

In order to gain immediate access to new customer segments and distribution channels, a merged entity must acquire a competitor or a company with complementary offerings. Additionally, horizontal M&A can enhance innovation and R&D. The merged entity can increase R&D investments by combining resources and expertise, leading to advances and staying ahead of industry trends.

It is essential, however, that these outcomes are effectively integrated, properly executed, and aligned with the business strategy as a whole.

Why would a company undertake a horizontal merger or acquisition?

A company may undertake a horizontal merger or acquisition for a variety of strategic reasons. For instance, it may want to gain a competitive edge by combining forces with a competitor. By consolidating, the company can improve its competitive position, gain a larger customer base, and increase its presence. Additionally, horizontal mergers and acquisitions can lead to cost savings and synergies.

A horizontal merger or acquisition can facilitate entry into new markets or geographies by streamlining processes, integrating operations, and eliminating redundancies. Thirdly, it can achieve economies of scale and enhance efficiency. The acquiring company can establish a presence and leverage existing distribution networks quickly if it acquires a company that has a strong foothold in another region.

The company’s product or service offerings can also be diversified as a result of a horizontal merger, offering customers more options and reducing reliance on a single product line. In addition, horizontal mergers can foster innovation and foster competitive advantages by combining resources and expertise.

A company can stay ahead of industry trends, enhance research and development efforts, and introduce new technologies by pooling knowledge and capabilities.

These strategic motivations are carefully evaluated by companies to determine if horizontal mergers and acquisitions align with their growth objectives and are likely to improve their market position, operational efficiency, and innovation.

Horizontal Merger MCQs

Some of the MCQs related to Horizontal Merger are as follows:

A horizontal merger involves the consolidation of:

  • a) Two companies operating in the same industry
  • b) Two companies operating in different industries
  • c) A supplier and a customer
  • d) A company and its competitor

Answer: a) Two companies operating in the same industry

Which of the following is a potential advantage of a horizontal merger?

  • a) Reduced market power
  • b) Decreased market share
  • c) Economies of scale
  • d) Limited product offering

Answer: c) Economies of scale

The purpose of regulatory scrutiny in a horizontal merger is to:

  • a) Promote anti-competitive behavior
  • b) Ensure consumer welfare and fair competition
  • c) Encourage monopolistic practices
  • d) Facilitate market concentration

Answer: b) Ensure consumer welfare and fair competition

Market concentration is assessed in a horizontal merger to evaluate:

  • a) Competitive effects
  • b) Potential efficiencies
  • c) Entry barriers
  • d) Cultural differences

Answer: a) Competitive effects

Remedies and divestitures may be required in a horizontal merger to:

  • a) Maximize market power
  • b) Increase market concentration
  • c) Address competition concerns
  • d) Encourage cultural integration

Answer: c) Address competition concerns

Bijisha Prasain
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