Horizontal integration occurs when two businesses merge that produce goods or services at the same level in the value chain. This can result in the creation of a monopoly or oligopoly. A horizontal integration is one of the most common types of merger, since it essentially means that competitors in the same market are combining their operations and assets. Here are several examples of horizontal integration:
- Two manufacturers of electric engines merge. One entity produces engines for cars, while the other entity produces engines for trucks.
- Two manufacturers of retail homes merge. One entity builds lower-income housing, while the other constructs high-end homes near golf courses.
- Two consulting firms merge. One entity provides software development services in the defense industry, while the other entity provides the same service, but in the oil and gas industry.
The horizontal integration strategy may be employed for several reasons, including the following:
- To gain production efficiencies by producing more units at central manufacturing facilities.
- To gain purchase volume discounts by buying raw materials in bulk
- To plug holes in the product line of the acquirer with products made by the acquiree
- To gain sufficient mass in the marketplace that the resulting combined company may make price increases stick
- To eliminate duplicative positions within the companies, thereby stripping out costs
If there are several horizontal integration mergers within the same industry that concentrate market share with a small number of companies, this is considered an oligopoly. If the resulting market share is largely held by one entity, this is considered a monopoly. In either case, the acquirer may be investigated under anti-trust laws, and a proposed acquisition may be rejected.
A different type of merger is vertical integration, which is when companies merge that are in different positions in the value chain. For example, a car manufacturer could buy a producer of car tires, in order to secure this input to its production line.