Horizontal Mergers - Horizontal Integration, Horizontal Monopoly, Horizontal Expansion

By: EconomyWatch   Date: 17 July 2010

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About Horizontal Mergers
Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. The principal objective behind this type of mergers is to achieve economies of scale in the production procedure through carrying off duplication of installations, services and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition, minimizing the advertising expenses, enhancing the market capability and to get more dominance on the market.

Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes result in monopoly and absorption of economic power in the hands of a small number of commercial entities.

According to strategic management and microeconomics, the expression horizontal merger delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial enterprise for marketing a form of commodity or service in a large number of markets. In the context of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of production or manufacturing.

Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition where a company is involved in taking over or acquiring another company in similar form of trade. In this way, a competitor is done away with and a wider market and higher economies of scale are accomplished.

In the process of horizontal merger, the downstream purchasers and upstream suppliers are also controlled and as a result of this, production expenses can be decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal expansion. This refers to the expansion or growth of a company in a sector that is presently functioning. The aim behind a horizontal expansion is to grow its market share for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

  • The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond
  • The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank
  • The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company
  • The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

    Advantages of Horizontal Merger:

    Horizontal merger provides the following advantages to the companies which are merged:

    1) Economies of scope

    The notion of economies of scope resembles that of economies of scale. Economies of scale principally denote effectiveness related to alterations in the supply side, for example, growing or reducing production scale of an individual form of commodity. On the other hand, economies of scope denote effectiveness principally related to alterations in the demand side, for example growing or reducing the range of marketing and supply of various forms of products. Economies of scope are one of the principal causes for marketing plans like product lining, product bundling, as well as family branding.

    2) Economies of scale

    Economies of scale refer to the cost benefits received by a company as the result of a horizontal merger. The merged company is able to have bigger production volume in comparison to the companies operating separately. Therefore, the merged company can derive the benefits of economies of scale. The maximum use of plant facilities can be done by the merged company, which will lead to a decrease in the average expenses of the production.

    The important benefits of economies of scale are the following:
     

  • Synergy
  • Growth or expansion
  • Risk diversification
  • Diminution in tax liability
  • Greater market capability and lesser competition
  • Financial synergy (Improved creditworthiness, enhancement of borrowing power, decrease in the cost of capital, growth of value per share and price earning ratio, capital raising, smaller flotation expenses)
  • Motivation for the managers

    For attaining economies of scale, there are two methods and they are the following:
     

  • Increased fixed cost and static marginal cost
  • No or small fixed cost and decreasing marginal cost

    One example of economies of scale is that if a company increases its production twofold, then the entire expense of inputs goes up less than twofold.

    3) Dominant existence in a particular market


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