Businesses are always looking for ways to grow, stay competitive, and improve efficiency. One of the most effective ways to achieve this is through mergers and acquisitions (M&A). Among the different types of mergers, horizontal mergers are particularly important because they reshape industries and reduce competition. In this guide, we’ll break down what horizontal mergers are, how they work, their pros and cons, and how they compare to vertical mergers. Let’s dive in!
What are horizontal mergers?
A horizontal merger happens when two or more companies in the same industry and at the same stage of the supply chain come together to form a single entity. These companies are usually direct competitors, offering similar products or services to the same group of customers.
Key characteristics:
Same industry: The businesses operate in the same sector.
Similar products or services: Both companies sell similar products or services.
Same supply chain level: Unlike vertical mergers, which involve companies at different stages of production, horizontal mergers bring together businesses at the same level.
Market dominance: The main goal is to increase market share, reduce competition, and improve efficiency.
How do horizontal mergers work?
The process of a horizontal merger can be complex and involves several stages. Below is a step-by-step breakdown of how it typically works:
1. Identifying the right merger partner
Before a merger takes place, companies assess potential partners based on:
Market position: Will the merger strengthen market dominance?
Financial health: Does the target company have strong financials and minimal debt?
Synergy potential: Will the merger create efficiencies and cost savings?
2. Negotiation and agreement
Once a suitable partner is found, negotiations begin. Typically a solicitor for buying a business can help with this. The businesses discuss:
The valuation of each company
How ownership will be structured
Legal and regulatory compliance
Financial arrangements, including stock or cash payments
3. Regulatory approval
Many horizontal mergers require approval from competition authorities such as the UK’s Competition and Markets Authority (CMA). Regulators assess whether the merger would:
Reduce consumer choice
Create a monopoly
Lead to higher prices for customers
If concerns arise, authorities may block the merger or ask for modifications like selling off parts of the business.
4. Integration and restructuring
Once approved, the two businesses must integrate their:
✅ Operations: Combining supply chains, logistics, and distribution channels.
✅ Employees: Merging workforces and streamlining job roles.
✅ Branding: Deciding whether to maintain separate brand identities or operate under one name.
✅ IT systems: Unifying databases, websites, and internal software.
Pros and cons
Like any business strategy, horizontal mergers come with both benefits and risks.
✅ Advantages of horizontal mergers | ❌ Disadvantages of horizontal mergers |
|---|---|
The newly merged company can become a more dominant player in the industry. | Competition authorities may block or restrict the merger. |
Larger production and distribution networks can lead to lower costs per unit. | Redundancies often occur when roles are duplicated. |
Eliminating a rival business strengthens market position. | Merging corporate cultures, systems, and operations can be complex. |
Larger businesses can negotiate better deals with suppliers. | If the new entity dominates the market, customers may face higher prices. |
The combined company may offer a wider range of goods or services. | Mergers sometimes lead to service disruptions or pricing changes. |
Learn more in our guide to the 12 benefits of mergers.
Horizontal merger vs. vertical merger compared
A vertical merger differs from a horizontal merger in that it involves companies at different stages of the supply chain rather than direct competitors. While horizontal mergers aim to dominate an industry, vertical mergers focus on streamlining operations and securing supply chain stability.
Feature | Horizontal merger | Vertical merger |
|---|---|---|
Type of companies involved | Competitors in the same industry | Companies at different stages of production |
Objective | Increase market share and reduce competition | Improve supply chain efficiency and cost savings |
Example | Two car manufacturers merging | A car manufacturer merging with a tyre supplier |
Potential regulatory concern | Monopoly formation | Market control over supply chain |
Real-life example of a horizontal merger
One of the most notable horizontal mergers in recent years was The Walt Disney Company’s acquisition of 21st Century Fox for $71.3 billion.
How was this a horizontal merger?
✅ Both companies operated in the entertainment industry
✅ They produced films, TV shows, and owned media networks
✅ The merger reduced competition between Disney and Fox
Why did Disney pursue this merger?
Expanded content library: Disney gained Fox’s film and TV assets, including franchises like X-Men and The Simpsons.
Greater control over streaming services: Strengthening Disney+ by adding Fox’s content.
Stronger market position: Competing against Netflix and other streaming giants.
What are the main challenges of a horizontal merger?
Although horizontal mergers can be highly beneficial, they can also present several challenges to navigate.
1. Regulatory approval
Competition regulators may block or impose restrictions on mergers if they limit consumer choice or create unfair market dominance.
2. Integration complexities
Merging operations, employees, IT systems, and company cultures can lead to unexpected difficulties and delays.
3. Cost of the merger
Large-scale mergers often require billions of pounds in funding, leading to high debt levels or significant financial risk.
4. Customer impact
Changes in pricing, product availability, or service quality can lead to customer dissatisfaction or brand damage.
5. Employee redundancies
To cut costs, companies may eliminate duplicate roles, leading to job losses and internal disruption.
FAQs
What is the difference between a merger and an acquisition?
A merger is when two companies combine as equals to form a new entity. An acquisition is when one company buys another, taking full control.
Do horizontal mergers always reduce competition?
Not always. In some cases, the merged company improves efficiency and innovation, benefiting consumers. However, in industries with few competitors, a horizontal merger can lead to higher prices and reduced choices.
Final thoughts
Horizontal mergers can be a powerful strategy for businesses looking to expand market share, reduce competition, and improve efficiency. However, they also come with risks, including regulatory hurdles, integration challenges, and potential market monopolisation. By carefully considering the pros, cons, and legal implications, companies can successfully navigate the complexities of horizontal mergers and maximise their growth potential.
Looking for legal advice? Get in touch today for a free, fixed-fee quote and to see how our corporate law solicitors can help.
References
Mergers from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.