Deals & Acquisitions
Feb 20, 2023
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This guide explains what horizontal integration is, how it works, and it highlights the advantages and disadvantages of horizontal integration. Here are some key takeaways about horizontal integration:
The term horizontal integration is used to describe an M&A deal where a business buys a competitor.
Horizontal integration comes about in one of two ways—a merger or an acquisition.
In a merger, two companies become one company (usually the bigger one). In an acquisition, the company being bought may be dissolved by the acquirer, or it may continue to operate under its existing brand name, but the brand/company is now owned by the acquiring company.
It’s important to understand that buying a competitor is an inorganic growth strategy. To learn more about organic growth vs inorganic growth, read this guide. Organic growth is growth to core operations of the business. A business grows organically through sales & marketing efforts, improving the product, hiring more staff, etc.
Inorganic growth is growth from mergers and acquisitions—which is the goal of horizontal integration.
A company considers horizontal integration a growth strategy.
By buying a competitor, they can add value to their company inorganically and improve their market position. As an example, assume Company A has a fair market value of $150m, and Company B has a fair market value of $50m. If Company A buys Company B for $100m, and after the deal, the market values Company A (which has now acquired its rival’s assets) at $250m, then we can look at this horizonal integration (acquisition) as what created that extra value.
Growth also comes through horizontal integration from an increase in market share and the potential ability to raise prices, which both result from decreased competition.
Inorganic growth strategies like what is described here are often better growth strategies for older, larger companies that have been operating for decades, have strong established competitors, and are limited by the size of their market for growth. They may be able to grow faster by buying a competitor than by trying to grow core operations even further. Horizontal integration is common here.
Often the opposite is true for newer, smaller companies that can have strong year-over-year growth and can make more than incremental growth year-by-year.
The potential drawbacks to horizontal integration are mainly concentrated on whether the deal fails. Mergers and acquisition deals can (and do) fail for a number of reasons.
If the deal doesn’t create the synergies that were expected at the time the deal was made, then the acquirer loses out. Value can even be destroyed if the result of the merger or acquisition proves to increase costs in the end.
Goodwill, created when Company A pays more for Company B than its fair market value is also tested annually for impairment in publicly traded companies. The amount paid that’s over the fair market value of Company B goes on Company A’s balance sheet as an asset at the time of purchase, but if that is proven to be too high later on, there will be goodwill impairment charges to offset this goodwill. Goodwill impairment charges would decrease the value of Company A, down the road.
Horizontal integration is when a company acquires a competitor. Vertical integration is when a company buys another company along its supply chain (rather than a competitor). When trying to understand horizontal integration (why a company would want to buy a competitor), it’s helpful to also understand vertical integration (why a company would want to buy another company up or downstream on its supply chain). You can read more about vertical integration here.
