Large companies are looking to find additional sources of expansion, one of the most popular being mergers and acquisitions. This article will consider real-life examples of horizontal mergers.
What is a horizontal merger?
Analysts say there are more than 10,000 mergers each year. The leader in this area is the United States, for obvious reasons. The American economy is currently considered one of the most developed, intense competition in the international market leads to the search for non-trivial solutions. Due to the crisis in the economic indicators of some countries, the number of mergers has increased.
There are several types of merges, one of them is horizontal merges. Such a process is the union of two or more companies in one production supply chain. It is the only type of merger that has more advantages than disadvantages. As a result, a new enterprise appears, which has much more opportunities for development, a broader economic structure. Horizontal mergers lead to less competition in the market.
Horizontal merges are allowed to reallocate control and management rights. Often, the process takes place at the initiative of investors who want to preserve their rights and invest in the most stable enterprise. The best option is to be directly involved in the affairs of the company. Often a merger occurs after one firm has invested in another organization in the same area of production.
This type of merger provides the combined company with a competitive advantage over the rest of the industry through economies of scale and increased capital available. However, if the state does not control horizontal mergers in some industries, then eventually a monopoly may form in it, because one firm, successfully pursuing its strategy of mergers and acquisitions, will gradually absorb all major competitors.
The buying corporation aims to increase its market segment; concentration in the commodity industry; oust competing corporations from the market, business enlargement to increase its efficiency.
Horizontal merges are also classified into two subclasses:
- mergers expanding the geography of sales (buying corporations) are carried out to acquire corporations that produce identical products, but operate in different geographic market segments;
- a merger expanding the product range of the purchasing corporation is carried out through the acquisition of an enterprise that produces similar but not identical products.
Examples of mergers of one production supply chain
Mergers and acquisitions have characteristics in different countries or regions of the world. For example, in contrast to the United States, where large companies merge or take over, in Europe, there are acquisitions of small and medium-sized companies, family companies, small joint-stock companies in related industries.
Horizontal integration is performed according to the following scenario. Let’s say two oil companies decide to merge. This will lead to some savings, for example, redundant positions will be reduced, production capacities will be better used, and excess ones can be sold, etc. You understand that by taking control of another competing company, you will increase capacity and processing volume, but at the same time, the overhead costs associated with the holding’s activities (administrative and marketing expenses, expenses of the sales department, legal department, etc.) will not increase.
So, there are the following real-life examples of horizontal mergers:
- the unsuccessful merger of car giants Daimler-Benz (Germany) and Chrysler (USA) in 1998, which ended with the sale of the latter in 2007;
- purchase in 1998 by the British company British Petroleum of the American company Amoco for 73 billion dollars;
- in 2000, America Online (AOL) bought its rival TimeWarnerInc for $ 164.75 billion;
- purchase of AT&T Inc. its American competitor T-Mobile USA Inc. for $ 39 billion;