Definition
A Horizontal Merger is defined as the merger between companies that operate in the same industry and are often direct competitors. The primary objective of such a merger is typically to achieve economies of scale, consolidate market share, and enhance competitive advantage. Given the potential to significantly alter market dynamics, horizontal mergers are closely scrutinized by regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, to ensure they do not substantially reduce competition.
Examples
- Merger of Coca-Cola and PepsiCo: Hypothetically, if these two beverage giants were to merge, it would be considered a horizontal merger as they are direct competitors in the soft drink market.
- Exxon and Mobil: The 1999 merger between these two oil industry competitors created one of the largest oil corporations in the world.
- Dell and EMC: In 2016, Dell and EMC, both of which were major players in the tech industry, merged to form Dell Technologies in a bid to expand market share and product offerings.
Frequently Asked Questions (FAQs)
What is the main purpose of a horizontal merger?
The main purpose of a horizontal merger is to create a more competitive entity by combining the resources and customer bases of two similar companies. This often aims at achieving cost efficiencies, expanding market share, and enhancing profitability.
Why are horizontal mergers scrutinized by regulatory authorities?
Horizontal mergers are scrutinized to prevent excess market concentration, which can lead to monopolistic practices, reduced competition, higher prices for consumers, and stunted innovation.
How does a horizontal merger differ from a vertical merger?
A horizontal merger occurs between companies operating in the same sector, whereas a vertical merger happens between companies at different stages of the production process, such as a manufacturer merging with a supplier.
What role does the FTC play in horizontal mergers?
The FTC reviews proposed horizontal mergers to ensure they comply with antitrust laws. If a merger is likely to significantly lessen competition, the FTC may block the merger or impose conditions to approve it.
What are potential efficiencies gained from a horizontal merger?
Efficiencies may include reduced costs through economies of scale, enhanced production capabilities, lower operational costs, and an expanded customer base.
Related Terms
- Horizontal Combination: A formal alliance between businesses operating in the same industry, usually with the objective of achieving similar benefits as a horizontal merger without a complete merger of operations.
- Antitrust Laws: Regulations that promote competition and prevent monopolies in the marketplace.
- Market Share: The portion of a market controlled by a particular company or product.
- Economies of Scale: Cost advantages reaped by companies when production becomes efficient, as costs can be spread over a larger amount of goods.
- Vertical Merger: A merger between two companies that operate at different stages in the production process for a specific finished product.
Online References
- Federal Trade Commission (FTC) Guide to Mergers
- Investopedia: Horizontal Merger
- Harvard Law School Discussion on Antitrust Laws
Suggested Books for Further Studies
- Mergers and Acquisitions: Law, Theory, and Practice by Claire A. Hill and Steven Davidoff Solomon
- The Art of M&A: A Merger Acquisition Buyout Guide by Stanley Foster Reed, Alexandra Reed Lajoux, and Paul Pignataro
- Mergers, Acquisitions, and Corporate Restructurings by Patrick A. Gaughan
Fundamentals of Horizontal Merger: Business Strategy Quiz
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