What is a Horizontal Merger?

What is a Horizontal Merger?

Definition

A horizontal merger involves the coming together of two companies that manufacture or deal with similar products. This type of merger usually gives the new company the ability to offer its customers a wider range of products. A horizontal merger may also result in various synergies and cost-saving opportunities.

What does horizontal merger mean?

A horizontal merger offers several advantages:

⇨ The new company would be much larger. This would give the combined entity greater economies of scale. There would be opportunities for cutting down expenses by reducing personnel who were carrying out the same task in the unmerged firms.

For example, the merged company would not require two Human Resources Departments.

⇨ Two companies could be selling similar or complementary products in different geographical areas. A merger would allow the new company to the opportunity to increase sales.

There could be two car manufacturers, one of which specializes in small cars and the other in larger and more expensive models. A horizontal merger would allow the firms to boost sales by combining their marketing efforts and their dealer network.

⇨ A merged company would be able to compete in a more effective manner. The larger market share that it would have would give it an advantage over other firms that are selling the same product.

Remember that a horizontal merger is different from a vertical merger. A vertical merger is between companies that were previously buying or selling from each other. One firm could have been supplying products that were a raw material for the other firm. This type of merger would allow the new company to cut costs as well as have greater control over their supply chain.

Example of horizontal merger

Back in 1999, Renault, a French car company, entered into an alliance with Nissan, a Japanese car manufacturer. Since then, the Renault-Nissan Alliance has enjoyed great success. Today, the two firms employ over 262,000 workers. Their combined sales are of the order of $180 billion.

Now, the firms are in talks to enter into a horizontal merger. They already have a common boss – Carlos Ghosn is chairman of Nissan and the chairman and CEO of Renault.

Why are they thinking of a merger now, after all these years? The auto industry could see a greater level of competition as consumers make the shift to electric vehicles. The two firms will be able to compete more effectively as a single unit.

Summary

A horizontal merger between two companies that sell similar products can provide the merged company with several advantages. It can lead to greater synergies, increased sales, and a rise in profits.