What It Is, How It Works, Example

What Is a Horizontal Acquisition?

A horizontal acquisition occurs when one company acquires another company in the same industry and works at the same production stage. The new entity may be well-positioned because of its increased market share or scalability than the standalone companies combined to form it. Horizontal acquisitions expand the capacity of the acquirer, but the basic business operations remain the same, unlike an acquisition that creates a wholly different company.

Understanding Horizontal Acquisitions

Mergers and acquisitions (M&A) are a common part of the business landscape. They involve combining businesses and/or their assets into a single unit. Mergers involve the consolidation of two or more companies into one entity while acquisitions occur when one company purchases another and takes it over.

A horizontal acquisition, which may also be referred to as horizontal integration, is one type of M&A strategy. This business transaction takes place between two or more companies within the same industry. Companies may consider executing a horizontal acquisition for different reasons, including (but not limited to):

• Reducing competition
• Diversifying their product offerings
• Creating new products
• Expanding their businesses
• Tapping into new markets
• Gaining market share

In a horizontal acquisition, both the acquirer and the target firm (the one being acquired) tend to produce the same goods or services and are at the same point in the production cycle. This is so the new entity can experience more production capacity and boost its profits and revenue. If the companies were at different stages of the production cycle, the equipment may not overlap and be as valuable to the acquiring entity.

Once a horizontal acquisition is complete, the target firm’s identity is usually dissolved and it becomes part of the acquirer. The business operations don’t change after the deal is complete. Shares of the target firm are dissolved if it is public and its shareholders may receive cash or stock in the acquiring company.

Advantages and Disadvantages of Horizontal Acquisitions

Horizontal acquisitions can be very beneficial to the companies involved. But, there are inherent drawbacks to this kind of business transaction. We’ve listed some of the most common pros and cons of this strategy below.

Advantages

Going through a horizontal acquisition requires a great deal of time and research. This is to ensure the transaction makes sense and is beneficial to all of the parties involved.

When it is successful, a horizontal acquisition provides the following benefits:

• Increased market share and larger customer base
• Access to new markets and product lines
• A reduction in competition and production costs
• The adoption of a recognized brand (if the target has one)
• A boost in revenue and profits

Disadvantages

Merging two similar companies may make sense on paper, but it isn’t always easy to execute. Antitrust laws prevent the reduction of competition—notably, the establishment of monopolies—in the marketplace. The power to produce goods and services lies in the hands of a few companies when there are few competitors, which allows them to price their offerings even higher. This is seen as harmful to consumers who have little choice.

Integrating two like companies in a horizontal acquisition can be challenging if the company cultures are vastly different. The target firm’s employees may find it difficult to adapt to and get acclimated to the new company’s processes and procedures, which means (extensive) training may be required to ensure a smooth transition.

The consolidation of two companies may lead to a reduction in flexibility. That’s because the new, larger company may not be able to react or adapt to market swings, consumer tastes, and economic conditions as quickly as a smaller company would.

Horizontal Acquisition vs. Vertical Acquisition

There are different types of acquisitions, some of which focus on obtaining equipment or control of operations at another point in the production cycle. A vertical acquisition is another kind of business transaction that results in the consolidation of two or more companies.

In a vertical acquisition, the companies involved are in the same industry, such as food production or energy. But unlike a horizontal acquisition, they are at different stages of the production cycle. The reasons for vertical acquisitions (also known as vertical integration) are the same as those for horizontal acquisitions. The acquiring company in a vertical acquisition, though, gets more control over the entire production process.

There are two types of vertical acquisitions:

An energy company that purchases a company that manages and maintains city power grids is an example of a vertical acquisition. That’s because the energy producer buys a company responsible for bringing its product closer to the end consumer.

Examples of Horizontal Acquisitions

Here’s a hypothetical example to show how horizontal acquisitions work. Suppose two rival energy companies deliver services to consumers in the same area. After some time, the two enter into negotiations to merge where Company A will purchase Company B. This is a horizontal acquisition because it is within the same industry and production schedule.

Real-World Examples

The following are examples of horizontal acquisitions that have taken place between some of the world’s most recognizable names:

• AT&T and Discovery announced a deal to merge Discovery with WarnerMedia. The deal, which closed in 2022, created a new media and entertainment company called Warner Bros. Discovery (WBD), which trades on the Nasdaq.
• In 2019, Disney’s (DIS) merger with 21st Century Fox went into effect. Both companies produce and provide entertainment and streaming services to consumers.
• Northwest Airlines merged with Delta (DAL) in 2008, combining their services into a single unit.
• Exxon and Mobil, two of the world’s largest energy companies merged to form ExxonMobil (XOM) in 1998. The transaction was completed the following year.

The Bottom Line

Mergers and acquisitions come in different forms, including horizontal acquisitions. Horizontal acquisitions take place between similar companies that are in the same stage of production. They allow companies to gain market share, expand their product lines, and eliminate the competition. But these deals can often take time to go through because regulators don’t want producers to have so much power that harms consumers.