What is a Lateral Merger?

A lateral merger is a merger with another firm of roughly the same size. It is also known as a horizontal merger. Businesses enter into lateral mergers for the reasons noted below.

What are the Advantages of a Lateral Merger?

There are several good reasons for a lateral merger, including being able to bid on larger projects, shrink overhead costs, and combine their expertise. We expand on these issues below.

Bidding Advantages

The combined firm is now in a position to qualify for bids to larger prospective customers. This is most likely to be the case when a government is the customer, since many governments place minimum size thresholds on who is allowed to bid on their requests for proposals.

Cost Reduction

Combining firms creates an opportunity to eliminate redundant overhead costs. This typically means that the merged entities shed much of their combined administrative staff, while retaining their engineering and production groups.

Expertise

The combined firms now have more personnel, which gives it more aggregate expertise than had previously been the case. This is an especially important issue when there is a great deal of expertise in the product design groups of the two companies.

What are the Disadvantages of a Lateral Merger?

There are several issues that may interfere with the completion of a lateral merger, including the issues noted below.

Control

Since the two merging entities are peers, there is no clear indication of who controls the business. This can result in the sudden departure of those employees who think they were given substandard jobs in the combined entity.

Firm Name

Since the firms are of about the same size, there is no dominant entity that enforces the use of its corporate name. Instead, the two parties are more likely to fight over the name to be used, though they might also settle upon an entirely new name; if so, they will need to spend a substantial amount on branding the new name.

Location

Again, since the firms are of about the same size, it can be difficult to negotiate where the combined entity shall reside. The result may be several locations, with no real attempt to combine into a single facility.