The company is expanding from its current position in the manufacturing process and performing a backward vertical integration. There may be economies of scale or cost synergies in marketing; research and development (R&D); production; and distribution. Or there may be economies of scale, which make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own.
The acquired company, Pixar, started off in 1986 and operated in the same animation space as Disney. It produced its first film, Toy Story, in 1995 which began a successful breakthrough into animation movie-making. Pixar’s digitally animated movies used modern technology and an innovative vision. Hence, by acquiring Pixar, Disney was able to merge Pixar’s state-of-the-art production value with its own existing expertise in 2D animation. Due to this horizontal merger, Disney has been able to consistently deliver a series of great works in the movie industry. An often-cited example is the merger of oil giants Exxon and Mobil in December1998 to create Exxon-Mobil, anew company whose scale gave it a market power that was greater than the sum of its component parts.
For example, a restaurant can expand to offer catering companies, or a beverage manufacturer may branch off to make food products. Indeed, the real motive behind a lot of horizontal mergers is that companies want to reduce competition—either from potential new entrants, established rivals, or firms offering substitute or alternative goods. Horizontal integration is a strategy where a company acquires, mergers or takes over another company in the same industry value chain. The social media industry has thousands of applications and posting capabilities, but Instagram was a true competitor with Facebook for younger markets and for ad space. In the merger, Facebook strengthened its social media position and removed the competition from Instagram.
Vertical Integration vs. Horizontal Integration: Key Differences, Explanation & Examples
However, as the mergerwas officially complete, the various loyalty programs were consolidated into one during the second half of 2018. There may be industry-wide pressure on costs – perhaps inputs have increased in price. In turn, this can lead to competing firms looking to horizontally integrate in order to reduce the burden of higher costs and benefit from economies of scale.
Tata Steel could use the expertise of Corus in producing the grades of steel for aerospace and automobiles for boosting its supply to the automobile market of India. On the other hand, Corus was supposed to get benefit from the expertise of Tata Steel in manufacturing steel at a low cost. This acquisition had strengthened the market position of Sun pharma is every aspect such as there was an increase in its net sales, gross profit, net profit, etc.
Disadvantages of horizontal integration
Both firms operate within the industry of motor vehicle manufacturing – making the deal another example of horizontal integration. Both Disney and Pixar are in the business of making animated movies and shows – meaning the deal was a form of horizontal integration. Although Disney has a greater variety of product offerings, it’s main business is situated horizontally from that of Pixar. Companies often pursue acquisitions in an attempt to get something specific. For example, Microsoft specifically wanted to enhance its presence in the video game market.
ExxonMobil, therefore, became one of the biggest oil companies in the world due to its increased efficiency in operations, pooling of resources, and streamlining of procedures. The prices of oil falling and the global competitive pressures engineered the horizontal integration between Exxon and Mobil. This is one of the well-known horizontal integration examples in the oil and gas sector. This horizontal integration merger combined the first and second largest energy corporations in the United States and became the third most valuable company in the world. Facebook (now Meta) acquiring Instagram is a typical example of horizontal integration because both companies operate in the same industry and share similar production stages in their photo-sharing services.
Horizontal integration through Acquisition
The goals behind adopting a horizontal integration strategy are to increase the size of the company, diversify the products or services it sells, and increase its customer base. When two companies merge, they hold a larger market share than when they did individually. This is when the company gains advantages from having higher production rates. Because these rates are higher, the cost of an item is reduced because the cost of an item is spread over a larger output. So for example, say a company manufactures computer chips, and after some lucrative business, they realize that merging with a competitor in the market will be beneficial to both businesses.
- After the merger, Marriott had access to over 6,000 properties in about 125 countries.
- Horizontal integration means that a company contains control over one part of the production process by controlling the majority or all of the resources at that particular junction of production.
- Pixar’s digitally animated movies used modern technology and an innovative vision.
- The well-known businesses who integrated horizontally are Disney, Facebook and Coca-Cola.
- Both horizontal integration and vertical integration are the practice of a company expanding its current operations.
For example, a car manufacturer could buy a producer of car tires, in order to secure this input to its production line. The key difference between the horizontal and vertical integration concepts is that horizontal integration occurs among similar businesses, while vertical integration occurs between suppliers and customers. Horizontal integration expands market share by acquiring a similar company serving customers in the same industry. Vertical integration can improve supply chain control, cost, and quality, including acquiring parts vendors and distributors. Horizontal vs. vertical integration strategies aren’t an either-or decision. There are several horizontal integration examples of companies that have hit the headlines over the years.
Is It Time to Integrate Horizontally? Your NetSuite Data Can Tell You
Volkswagen and Porsche’s merger began in December 2009, when Volkswagen purchased a 49.9% stake in Porsche for 3.9 billion Euros. Porsche desperately needed this money to settle the debts that it had accumulated in its attempted takeover of Volkswagen. However, in 2012, Porsche was financially weak and Volkswagen bought the remaining 50.1% shares of this sports car manufacturer for 4.46 billion Euros, thus, taking full ownership of the company.
Walt Disney began in 1923 as an animation studio that expanded into live-action film production, television, and theme parks to target families and children. However, after numerous events of successful ventures, the company began to face creative stagnation and market saturation with its operations in the early 21st century. Experiencing a stage of stagnation, Disney was looking at ways to reinvent itself and resorted to acquiring Pixar in 2006, in a $7.4 billion deal. Horizontal integration takes place when a company merges or acquires another company that is at the same point of its value chain in the same industry. Typical horizontal integration examples could be a manufacturer acquiring another manufacturer, a distributor merging with another distributor, or a raw materials owner merging with another raw materials owner. The ultimate goal of vertical integration is to become independent of suppliers and control more aspects of the supply chain.
Why Horizontal Integration Is Important
Companies seek for growth because that will lead to a greater control and power over the market and competition. In an already successful organization, the goal can be to achieve market dominance. NVIDIA acquired Bright Computing, a high-performance computing (HPC) software provider, through backward vertical integration in January 2022. According to Network World, NVIDIA’s M&A intent is in-house use of Bright Computing, although Bright Computing will continue to sell to other customers.
- This example of an acquisition shows an often deliberate strategy for a specific sector in which a company wants to achieve a very specific goal.
- She is a former CFO for fast-growing tech companies with Deloitte audit experience.
- Horizontal integration can be an effective strategy to increase profits for a business.
- A horizontal merger happens once two companies combined that operate and compete in a similar or same type of business activity.
- Now they can buy larger quantities of product in bulk, which effectively makes each unit cost less to produce because more product is being shipped the same way for the same amount.
This helps the organization to achieve its desired commercial position within the market. With these complementary activities the company pursues a common objective e.g. a greater market share. In 2012, Facebook bought Instagram for $1 billion in cash and stock with the intention to keep Instagram management independent. horizontal integration example The acquisition business was officially closed at the price of $300 million in cash and 23 million shares. Alternatively, it is possible to execute horizontal integration by creating new businesses. Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies.
When two companies merge together, they can benefit from a number of efficiencies. First of all, it doesn’t need so many staff members – especially in departments that overlap. For instance, finance and HR might see a lot of redundancies as many of the tasks can be condensed and made more efficient. It acquired an up and coming competitor, whilst also diversifying its portfolio, risk, and income revenues. According to McKinsey, the total value of larger deals (valued greater than $25 million) for the year peaked at $5.9 trillion, up 37% from 2020.
When implemented correctly, horizontal integration can increase the market share and power of two companies. This merger proved extremely beneficial to both companies, even without merging the “houses” that produced the animation. Pixar’s innovation, when combined with Disney’s formulaic storytelling method and top-notch character marketing, led to both increased market shares and spikes in profits. At its core, horizontal integration is the term used to describe the merger of two or more corporations that operate in the same areas of production. In layman’s terms, it means that a company has bought out and absorbed another that is a direct competitor. One of the major problems with horizontal integration is that it can result in a monopoly if done in a way that won’t allow for competition.
This was good business for Facebook, as Instagram is now valued in excess of $100 billion. Horizontal integration can allow companies to quickly expand their reach and expertise while reducing costs. With this acquisition, Facebook was able to focus development on improving Instagram and Facebook, instead of on competition between the two. In March 2015, Kraft acquired Heinz to become the Kraft Heinz Corporation (KHC).
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If the goods or services offered by the merging companies are the same or very similar, it is known as a ‘merger of competitors’. Vertical Integration is the opposite from Horizontal Integration, and it models the style of ownership and control. Horizontal or vertical integration can be a stock, debt, or cash M&A deal for an entire company, subsidiary, division, or product line.
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