What is a horizontal merger?
A horizontal merger occurs when companies operating in the same or a similar industry merge together. When large horizontal mergers occur, they can reduce competition in a market, and as such, they are commonly reviewed by competition authorities. Competition authorities regulate and enforce competition laws to protect consumers from anti-competitive practices.
Horizontal mergers have been relatively commonplace over the years and can offer various benefits to the companies involved in them. For all you need to know about them, Business Leader investigates…
Are horizontal mergers good or bad for businesses?
One of the potential benefits of horizontal mergers is that, for companies selling similar products, combining product sales means a greater share of the market.
When there are two companies with complementary products ranges, merging allows for a wider range of products to be offered to consumers too.
Merging with a competitor might also mean the two companies can reduce their rivalry with one another and share their complementary skills and resources instead, which can lead to further innovation.
However, there are obstacles to horizontal mergers too; it can be difficult to merge two different company cultures, plus differing management styles can inhibit a successful working relationship being established. This can mean the merging companies are unable to cooperate with one another, damaging the value of the company.
Whilst there are potential benefits for the companies involved in mergers, horizontal mergers might have implications for the wider market, especially where competition is concerned.
Firstly, combining firms eliminates competition, and when these companies are particularly sizable, this can have significant knock-on effects for the market.
It can also create companies with so much market power that they can raise prices by reducing their output, without the agreement of other businesses. This can lead to consumers having to pay unfairly high prices.
When there are companies with such a high market concentration, it might also prompt the other companies in that market to coordinate their pricing and output decisions.
For these reasons, in the UK, the Competition and Markets Authority (CMA) oversees the functioning of markets, overseeing any mergers that take place.
Are mergers always successful?
Not always. One of the most famous examples of a failed merger was BMW’s acquisition of Rover for £800m back in 1994.
By the time BMW sold the British car manufacturer in 2000, they were experiencing astounding losses of £2m a day and ended up selling the Rover Longbridge plant to the Phoenix Consortium for just £10!
One of reasons for the failure of the merger was BMW completing a deal in just 10 days, meaning they did not look closely enough at the operation – and problems – of the businesses within Rover.
However, a clash of company cultures and poor leadership have also been cited as reasons for its failure.
Successful examples of horizontal mergers
One of the biggest horizontal mergers in recent times was the integration of Facebook, WhatsApp, Instagram and Messenger.
Previously, these social media platforms were all independent of one another, but have since been integrated into one big social media company because of purchases by Facebook Inc.
Another example of horizontal merger was when German software solutions providers SNP Schneider-Neureither & Partner SE acquired Datavard AG, another German software company.
Gloucester-based accountancy practice Little & Company was sold to Randall & Payne, a Cheltenham accountancy firm, earlier this year too.
What is the value of horizontal mergers in the UK?
According to the Office for National Statistics, in March 2021, there were 153 mergers and acquisitions involving UK companies (transactions that result in the change of ultimate control of the target company and have a value of £1m or more).
Between January and March 2021, the value of inward mergers and acquisitions (when a foreign company acquires or mergers with an existing company) was £6.1bn, whilst domestic mergers and acquisitions were valued at £3.8bn during the same period.
Clearly, the horizontal merger market is of considerable value, but the success of these recent acquisitions will likely depend on how well they battle the ongoing difficulties caused by Brexit and the pandemic.