California residents who follow business news may have heard the term “horizontal integration”. This is the merger of two companies that operate in the same industry and at the same point in the supply chain. Horizontal integration unites competitors and increases market share and influence, but it also has some disadvantages. Horizontal mergers between market leaders are closely scrutinized by the Federal Trade Commission, and the larger companies that emerge from these transactions sometimes lack entrepreneurial flair and flexibility.
Advantages of horizontal integration
Horizontal integration provides several synergistic benefits because the companies involved in these transactions operate in the same industry. This means they compete for the same customers, use the same resources and deal with the same suppliers. When mergers and acquisitions result in horizontal integration, the new company is usually far more powerful. If one of the companies involved is known for quality and the other is a value brand, the new company will have a reputation for quality and value.
Drawbacks of horizontal integration
Anti-trust laws were passed to prevent the kind of unhealthy market dominance that horizontal integration can create, which is why these transactions are subjected to a great deal of regulatory scrutiny. The companies that emerge from horizontal integration may also be too large and cumbersome to adapt quickly to changing market conditions, which can erode rather than build value.
Benefits that cannot be ignored
The companies involved in a horizontal integration are usually fierce competitors, and merging may provide them with benefits that cannot be ignored. Horizontal integration can lead to lower overheads, increased revenues and a more diverse range of products. However, these benefits may not always be in the best interests of consumers, which is why these transactions are closely scrutinized, and sometimes blocked, by the FTC.
