Horizontal integration

Last updated

A diagram illustrating horizontal integration and contrasting it with vertical integration Integration in English.svg
A diagram illustrating horizontal integration and contrasting it with vertical integration

Horizontal integration is the process of a company increasing production of goods or services at the same level of the value chain, in the same industry. A company may do this via internal expansion, acquisition or merger. [1] [2] [3]

Contents

The process can lead to monopoly if a company captures the vast majority of the market for that product or service. [3] Other benefits include, increasing economies of scale, expanding an existing market or improving product differentiation.

Horizontal integration contrasts with vertical integration, where companies integrate multiple stages of production of a small number of production units.

Horizontal alliance

Horizontal integration is related to horizontal alliance (also known as horizontal cooperation). However, in the case of a horizontal alliance, the partnering companies set up a contract, but remain independent. For example, Raue & Wieland (2015) describe the example of legally independent logistics service providers who cooperate. [4] Such an alliance relates to competition.

Aspects

Benefits of horizontal integration to both the firm and society may include economies of scale and economies of scope. For the firm, horizontal integration may provide a strengthened presence in the reference market. [5] This means that with the merger, two firms would then be able to produce more revenue than one firm alone. It may also allow the horizontally integrated firm to engage in monopoly pricing, which is disadvantageous to society as a whole and which may cause regulators to ban or constrain horizontal integration. [6] Strategies around horizontal mergers often relate to revenue production, reducing market entrants or expanding into new markets. [7] The three forms of horizontal integration are mergers, acquisitions and internal expansion. [8]

Mergers:

Mergers and acquisitions (M&A) refer to the consolidation of companies or assets through various financial transactions, such as mergers, acquisitions, and consolidations. [9] M&A activities can be an effective way for companies to expand their operations, diversify their product or service offerings, and increase their market share. [10] These activities can also lead to cost savings, increased efficiencies, and access to new technologies or markets. [11]

Mergers involve the combination of two or more companies to form a new entity. This can occur through a stock-for-stock transaction, where shareholders of both companies receive shares in the new entity based on a predetermined exchange ratio. [12] Alternatively, a cash merger can occur, where one company purchases another using cash or other financial instruments. [13]

Acquisitions:

Acquisitions, on the other hand, involve the purchase of one company by another. This can occur through a friendly acquisition, where the target company agrees to the acquisition and its shareholders receive compensation for their shares. [14] Alternatively, a hostile takeover can occur, where the acquiring company purchases a controlling stake in the target company without its approval. [15]

Consolidations refer to the combination of two or more companies to form a single entity without the creation of a new entity. This can occur through the merger of equals, where two companies of equal size and strength combine forces, or through the acquisition of a smaller company by a larger one. [16]

M&A activities can have a significant impact on various stakeholders, including shareholders, employees, customers, and suppliers. Shareholders can benefit from increased stock prices and dividends, while employees may face job losses or changes to their employment terms. Customers and suppliers may also be affected by changes to product or service offerings and supplier relationships. [17]

Regulatory bodies play an important role in overseeing M&A activities to ensure they do not violate antitrust laws and do not harm competition in the marketplace. [18] The approval of mergers and acquisitions may also require approval from government agencies or industry regulators.

Overall, mergers and acquisitions can be an effective strategy for companies to achieve growth and gain a competitive advantage. However, careful consideration of the potential benefits and drawbacks, as well as regulatory compliance, is essential to ensure a successful outcome for all stakeholders involved. [19]

Internal Expansion:

In addition to mergers and acquisitions, companies can also pursue internal expansion through horizontal integration. [20] This involves expanding their operations and product or service offerings within their existing industry by acquiring or developing new capabilities.

Horizontal integration can take various forms, including expanding through new product development, expanding geographically, or acquiring competitors or suppliers. [21] This strategy can enable companies to increase their market share and achieve economies of scale by leveraging existing resources and capabilities. [22]

Internal expansion through horizontal integration can also involve the integration of different business functions, such as production, marketing, and sales, to streamline operations and increase efficiency. [23] This can result in cost savings and improved profitability. [24]

However, there are potential drawbacks to internal expansion through horizontal integration. [25] It can be costly and time-consuming to develop new capabilities or expand into new markets, and there is a risk that these efforts may not be successful. Additionally, companies may face increased competition and regulatory scrutiny as they expand their operations. [26]

Overall, internal expansion through horizontal integration can be a viable strategy for companies looking to achieve growth and gain a competitive advantage. [27] However, it requires careful planning, execution, and management to ensure success and mitigate potential risks. Companies should also consider the potential benefits and drawbacks of this strategy compared to other growth strategies, such as mergers and acquisitions. [28]

Media terms

Media critics, such as Robert W. McChesney, have noted that the current trend within the entertainment industry has been toward the increased concentration of media ownership into the hands of a smaller number of transmedia and transnational conglomerates. [29] Media is seen to amass in center where wealthy individuals have the ability to purchase such ventures (e.g., Rupert Murdoch).[ citation needed ]

That emerged are new strategies for content development and distribution designed to increase the "synergy" between the different divisions of the same company. Studios seek content that can move fluidly across media channels. [30]

Examples

An example of horizontal integration in the food industry was the Heinz and Kraft Foods merger. On 25 March 2015, Heinz and Kraft merged into one company, the deal valued at $46 billion. [31] [32] Both produce processed food for the consumer market.

On 9 December 2013, Sysco agreed to acquire US Foods but on 24 June 2015, the federal judge ruled against the deal saying that such merger would control 75% of the U.S. foodservice industry and that will stifle competition. [33] It would have been horizontal integration, as both distribute food to restaurants, healthcare, and educational facilities.

On 16 November 2015, Marriott International announced that it would acquire Starwood for $13.6 billion, creating the world's largest hotel chain. [34] The merger was finalized on 23 September 2016. [35]

The AB-Inbev acquisition of SAB Miller for $107 Billion, which completed in 2016, is one of the biggest deals of all time. [36]

On 1 November 2017, Centurylink bought Level 3 Communications for $34 billion, and incorporated Level 3 as part of Centurylink.

On 14 December 2017, The Walt Disney Company announced a $52.4 billion bid in stock to acquire 21st Century Fox along with its bulk of assets, which included the famed 20th Century Fox film studio and other assets such as FX Networks and 30% stake in Hulu. Both companies produced and distributed films and television series, as well as each owning a 30% stake in Hulu. [37]

See also

Related Research Articles

<span class="mw-page-title-main">Aon (company)</span> British multinational corporation

Aon PLC is a British-American professional services and management consulting firm that offers a range of risk-mitigation products. The firm also provides data and analytics services, strategy consulting through Aon Inpoint and investment banking advisory through Aon Securities. Aon has approximately 50,000 employees across 120 countries.

<span class="mw-page-title-main">Mergers and acquisitions</span> Type of corporate transaction

Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

<span class="mw-page-title-main">Conglomerate (company)</span> Large company involved in many industries

A conglomerate is a type of multi-industry company that consists of several different and unrelated business entities that operate in various industries under one corporate group. A conglomerate usually has a parent company that owns and controls many subsidiaries, which are legally independent but financially and strategically dependent on the parent company. Conglomerates are often large and multinational corporations that have a global presence and a diversified portfolio of products and services. Conglomerates can be formed by merger and acquisitions, spin-offs, or joint ventures.

The Herfindahl index is a measure of the size of firms in relation to the industry they are in and is an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust regulation, and technology management. HHI has continued to be used by antitrust authorities, primarily to evaluate and understand how mergers will affect their associated markets. HHI is calculated by squaring the market share of each competing firm in the industry—expressed as either fractions, decimals, or whole numbers—and then summing the resulting numbers. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer. Increases in the HHI generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, the index can be expressed per 10,000 "points". For example, an index of .25 is the same as 2,500 points.

<span class="mw-page-title-main">Investment banking</span> Type of financial services company

Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services or research. Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket, Middle Market, and boutique market.

In the field of finance, private equity (PE) is stock in a private company that does not offer stock to the general public. Private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms rather than the companies that they invest in.

<span class="mw-page-title-main">Vertical integration</span> When a company owns its supply chain

In microeconomics, management and international political economy, vertical integration is an arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It contrasts with horizontal integration, wherein a company produces several items that are related to one another. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership but also into one corporation.

<span class="mw-page-title-main">Foreign direct investment</span> Purchase of an asset

A foreign direct investment (FDI) refers to purchase of an asset in another country, such that it gives direct control to the purchaser over the asset. In other words, it is an investment in the form of a controlling ownership in a business, in real estate or in productive assets such as factories in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment or foreign indirect investment by a notion of direct control.

Capgemini Engineering is a global innovation and engineering consulting firm founded in 1982 in France by Alexis Kniazeff and Hubert Martigny.

In business, a white knight is a friendly investor that acquires a corporation at a fair consideration with support from the corporation's board of directors and management. This may be during a period while it is facing a hostile acquisition from another potential acquirer or it is facing bankruptcy. White knights are preferred by the board of directors and/or management as in most cases as they do not replace the current board or management with a new board, whereas, in most cases, a black knight will seek to replace the current board of directors and/or management with its new board reflective of its net interest in the corporation's equity.

The software industry includes businesses for development, maintenance and publication of software that are using different business models, mainly either "license/maintenance based" (on-premises) or "Cloud based". The industry also includes software services, such as training, documentation, consulting and data recovery. The software and computer services industry spends more than 11% of its net sales for Research & Development which is in comparison with other industries the second highest share after pharmaceuticals & biotechnology.

In finance, assets under management (AUM), sometimes called fund under management, measures the total market value of all the financial assets which an individual or financial institution—such as a mutual fund, venture capital firm, or depository institution—or a decentralized network protocol controls, typically on behalf of a client. Funds may be managed for clients, platform users, or solely for themselves, such as in the case of a financial institution which has mutual funds or holds its own venture capital. The definition and formula for calculating AUM may differ from one entity to another.

Authorities provide differing definitions of the middle-market or mid-market companies. While some authorities look to revenue generated by companies to define the middle market, other sources regard either asset size or number of employees as a better metric for comparing company sizes.

<span class="mw-page-title-main">Intercontinental Exchange</span> American exchange and clearing house company

Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell 1000, the company owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada and Europe, the Liffe futures exchanges in Europe, the New York Stock Exchange, equity options exchanges and OTC energy, credit and equity markets.

Diversification is a corporate strategy to enter into a new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge.

Inorganic growth is the rate of growth of business, sales expansion etc. by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions and take-overs. This kind of growth also takes place due to government directives, leading to enhancement of business in some identified priority sector/area. The inorganic growth rate also factors in the impact of foreign exchange movements or performance of other economies.

<span class="mw-page-title-main">Canaccord Genuity</span> Canadian financial company

Canaccord Genuity Group Inc. is a global, full-service investment banking and financial services company that specializes in wealth management and brokerage in capital markets. It is the largest independent investment dealer in Canada. The firm focuses on growth companies, with operations in 10 countries worldwide and the ability to list companies on 10 stock exchanges. Canaccord Genuity, the international capital markets division, is based in Canada, with offices in the US, the UK, France, Germany, Ireland, Hong Kong, China, Singapore, Dubai, Australia, and Barbados.

India has an Internet user base of about 690.0 million as of November 2023, about 40% of the population. Despite being the second-largest user base in world, only behind China, the penetration of e-commerce is low compared to markets like the United States, or France, but is growing, adding around 6 million new entrants every month. The industry consensus is that growth is at an inflection point.

<span class="mw-page-title-main">Ansoff matrix</span> Strategic planning tool

The Ansoff matrix is a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future business growth. It is named after Russian American Igor Ansoff, an applied mathematician and business manager, who created the concept.

<span class="mw-page-title-main">Kraft Heinz</span> American multinational food company

The Kraft Heinz Company (KHC), commonly known as Kraft Heinz, is an American multinational food company formed by the merger of Kraft Foods and H.J. Heinz Company co-headquartered in Chicago and Pittsburgh. Kraft Heinz is the third-largest food and beverage company in North America and the fifth-largest in the world with over $26.0 billion in annual sales as of 2021.

References

  1. ↑ "Horizontal Integration Definition". economicshelp.org. Retrieved 5 February 2016.
  2. ↑ "Definition of Horizontal Integration in a Supply Chain". smallbusiness.chron.com. Retrieved 5 February 2016.
  3. 1 2 "horizontal integration". businessdictionary.com. Retrieved 5 February 2016.
  4. ↑ Raue, Jan Simon; Wieland, Andreas (2015). "The interplay of different types of governance in horizontal cooperations" (PDF). The International Journal of Logistics Management. 26 (2): 401–423. doi:10.1108/IJLM-08-2012-0083. hdl: 10398/4de0953a-3920-409a-b63a-60342c976528 . S2CID   166497725.
  5. ↑ "What Is Horizontal Integration? Definition and Examples". Investopedia. Retrieved 24 April 2023.
  6. ↑ "Horizontal Integration - What It Really Means For Marketing - Ardor Media Factory". Ardor Media Factory. 19 February 2016. Retrieved 19 February 2016.
  7. ↑ "What Is Horizontal Integration? Definition and Examples". Investopedia. Retrieved 24 April 2023.
  8. ↑ "Physics-integrated Segmented Gaussian Process (SegGP) learning for cost-efficient training of die..." 23 January 2023. doi:10.2514/6.2023-1283.vid . Retrieved 24 April 2023.
  9. ↑ "Mergers and Acquisitions: What's the Difference?". Investopedia. Retrieved 24 April 2023.
  10. ↑ "Mergers and Acquisitions: What's the Difference?". Investopedia. Retrieved 24 April 2023.
  11. ↑ "Mergers & Acquisitions (M&A)". Corporate Finance Institute. Retrieved 24 April 2023.
  12. ↑ "What are mergers and acquisitions (M&A)". BDC.ca. Retrieved 24 April 2023.
  13. ↑ "What are mergers and acquisitions (M&A)". BDC.ca. Retrieved 24 April 2023.
  14. ↑ "What are Mergers & Acquisitions (M&A): The Only Guide you Need". dealroom.net. Retrieved 24 April 2023.
  15. ↑ "What are Mergers & Acquisitions (M&A): The Only Guide you Need". dealroom.net. Retrieved 24 April 2023.
  16. ↑ "Mergers and Acquisitions - M&A Types, Examples, Process". ansarada. Retrieved 24 April 2023.
  17. ↑ "Mergers and Acquisitions - M&A Types, Examples, Process". ansarada. Retrieved 24 April 2023.
  18. ↑ "Mergers and Acquisitions - M&A Types, Examples, Process". ansarada. Retrieved 24 April 2023.
  19. ↑ "Mergers & Acquisitions | Financial Times". www.ft.com. Retrieved 24 April 2023.
  20. ↑ "Internal growth - Business growth - Eduqas - GCSE Business Revision - Eduqas". BBC Bitesize. Retrieved 24 April 2023.
  21. ↑ Nasrudin, Ahmad (17 August 2020). "Internal Growth: Methods, Advantages & Disadvantages". Penpoin. Retrieved 24 April 2023.
  22. ↑ "Internal Growth Rate (IGR): Definition, Uses, Formula and Example". Investopedia. Retrieved 24 April 2023.
  23. ↑ "Internal Growth Rate (IGR): Definition, Uses, Formula and Example". Investopedia. Retrieved 24 April 2023.
  24. ↑ "Internal Growth – Evaluation — Super Business Manager" . Retrieved 24 April 2023.
  25. ↑ "Internal Growth – Evaluation — Super Business Manager" . Retrieved 24 April 2023.
  26. ↑ "How firms grow in size". Economics Help. Retrieved 24 April 2023.
  27. ↑ "How firms grow in size". Economics Help. Retrieved 24 April 2023.
  28. ↑ "How firms grow in size". Economics Help. Retrieved 24 April 2023.
  29. ↑ Thorburn, David and Jenkins, Henry (eds.)(2003). Rethinking Media Change: The Aesthetics of Transition. Cambridge, Mass.: MIT Press. p. 283.
  30. ↑ Thorburn, David and Jenkins, Henry (eds.)(2003). Rethinking Media Change: The Aesthetics of Transition. Cambridge, Mass.: MIT Press. p. 284.
  31. ↑ Gelles, David (25 March 2015). "Kraft and Heinz to Merge in Deal Backed by Buffett and 3G Capital". The New York Times.
  32. ↑ "Why You Should Pay Attention to the Heinz/Kraft Merger". 3 April 2015.
  33. ↑ Gasparro, Annie (July 2015). "Sysco Ends Plans to Merge With US Foods". Wall Street Journal. WSJ. Retrieved 5 February 2016.
  34. ↑ Nycz-Conner, Jennifer (16 November 2015). "Marriott International to acquire Starwood Hotels & Resorts Worldwide in $12.2 billion deal". American City Business Journals .
  35. ↑ Trejos, Nancy (23 September 2016). "Marriott, Starwood merger is complete, loyalty programs will reciprocate". USA Today. Retrieved 24 September 2016.
  36. ↑ "It's Final: AB InBev Closes on Deal to Buy SABMiller". Forbes .
  37. ↑ Nolter, Chris (December 14, 2017). "Disney Acquires Most of Fox's Assets in Blockbuster $52.4 Billion Stock Deal". TheStreet.com . Archived from the original on December 15, 2017. Retrieved December 15, 2017.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.