However, it is a risky strategy that can lead to monopolies, which are subject to anti-trust laws. Some examples of companies that have utilized this strategy are Disney studios, which bought out Pixar, and Standard Oil, which was an oil company founded by Rockefeller, but disbanded due to monopolization. Vertical integration is a strategy of integrating business with other businesses up or down the supply chain. The strategy is effective for greater control over the whole manufacturing process, timing, and all stages of development. Besides this, vertical integration has many advantages for business growth. Walt Disney’s acquisition of Pixar is one of the notable horizontal integration examples.
The company is still involved in the same supply chain stage but is becoming more powerful. Another business that integrated vertically and won the competition game is Mcdonald’s. The company acquired some plants and also created its own manufacturing businesses to ensure the consistency of its products around the globe and better quality. After the merger, Lakshmi Niwas Mittal became the President of Arcelor-Mittal and owned the majority stake.
Horizontal integration through Acquisition
Not only can it help the other firm to penetrate the market, but also allow it to introduce other products that it has to offer. As we saw with the merger of Exxon and Mobil – they both operated in different markets. As a result of the merger, they were able to share that working knowledge, thereby allowing it to penetrate the market further. If we look at Facebook and Instagram for example – both are social media entities, yet Instagram is very photo orientated, thereby attracting a different target market.
However, the Sysco acquisition of US Foods in 2015 showed increased jurisdiction on such mergers. The Federal judge ruled against the deal due to concerns that it would create over 75% market control and stifle competition. That said, there are future lined-up horizontal integration deals that show no signs of diminishing anytime soon. The main advantage of horizontal integration is the strategically focused decision to penetrate a specific section of a supply chain. Horizontal integration allows a company to potentially acquire a competitor, gain greater insight into the market, expand its product line, or create economies of scale.
Types Of Horizontal Integration
An M&A process is known as horizontal or vertical integration, depending on the acquisition type and business strategy. Though Facebook has acquired Instagram, still Instagram has its own independent social media platform. Vodafone India and Idea Cellular merged in August 2018 to form India’s largest telecommunication company to own approx. Both companies are into the telecommunication business and offer services to customers such as phone, mobile, internet facility, data, etc. This merger resulted in a global technology leader worth the US $87 billion that offers the most extensive IT products and services for customers and businesses.
The estimated value of Instagram as of 2018 per Bloomberg’s Intelligence Report. Facebook’s horizontal integration of Instagram was truly historic with a return of 100% in just over six years. In this video, Paj Holden talks about the different kinds of integration there are in the world of business.
Horizontal Integration Example
HI is different from vertical integration, where a firm usually expands into another production stage rather than merging or acquiring the company in the same production stage. For example, a company is vertically integrating if it expands from manufacturing industry to retailing industry, while HI would mean buying other firms in the same manufacturing industry. The aim of Sun pharma for this acquisition was to get better reach to emerging markets and gain a stronghold in the domestic market. So, the combined entity of both companies emerged as a global market of specialty and generic products. The merger between these two oil giants helped the firm diversify its portfolio, with each company having a foothold in different parts of the world. The horizontal integration used by Exxon enabled it to gain access to Mobil’s gas stations and its product reserves.
- Following are several horizontal integration examples today and the companies that have made the process work for them.
- The acquiring company’s staff, executives, and operations often remain in place, while the acquired company’s resources are integrated as management sees fit.
- Facebook itself has far less competitive pressure since it acquired Instagram.
- Companies often pursue acquisitions in an attempt to get something specific.
The full merger was due to happen in 2011 – where Volkswagen would take full ownership. The deal benefited both parties as Pixar had a state of the art and innovative design studio – whilst Disney had the big budgets and distribution networks.
Horizontal Integration as a production strategy including an example
Vertical integration occurs when a company acquires a company outside of their current position along the supply chain. For example, a manufacturer may acquire a retail company so that the manufacturer can not only control the process of making the good but also selling the good as well. Like any merger, horizontal integration does not always yield the synergies and added value that was expected. Similar to a merger, an acquisition occurs when one company outright takes over the operations of another company.
In this process, a higher price than the stock’s market value is offered by the acquiring firm to shareholders of the target firm to buy its shares. In proxy fight takeover, the acquiring firm seeks the voting rights of shareholders of the target firm to have control over its board of directors. The final stage of the takeover includes filing an acquisition notice of 30 days with the SEC (Security & Exchange Commission) and the board of directors of the target firm.
A company that initiates a horizontal integration expands its reach in the stage it is in the value chain in which it operates, instead of reaching into other stages of the value chain. In this article, we will be discussing some real-life examples of horizontal integration companies and how it has contributed to their growth. This can also lead to geographic expansion, where the company looks at similar companies outside of its own geographic nature. The deal was just one of a series of transactions that the company conducted to achieve that level of scale. Since then, the company has moved into vertical mergers, acquiring some technology and pharmaceutical services firms, but the Albertsons deal was the biggest horizontal acquisition CVS ever made. You might recall that a vertical integration involves acquiring a company at a different stage of the supply chain – For example, a manufacturer acquiring a distributor.
Advantages of vertical integration
When two firms merge, there is also likely to be an additional layer of management – as well as a potential geographical expansion. For instance, if the two companies are operating in different countries, it reduces the risk of both a decline in domestic demand, but also currency fluctuations. However, when horizontal mergers succeed, it is often at the expense of consumers, especially if the merger reduces competition. For this reason, horizontal mergers are heavily scrutinized by regulators, to see if they violate antitrust laws. Pixar operated in the same animation space as Disney, but its (digitally) animated movies used cutting-edge technology and an innovative vision.
One of the first things that KHC did was to make cuts in any existing redundancies in an effort to boost profits. The acquisition did not involve a merge of names, but did involve Walt Disney Studios as a subsidiary and The Walt Disney Company as owner. In 2001 and 2004, Pixar had conflicts with Disney because the terms of collaboration for the films were not agreed upon. Pixar wanted Disney to only distribute the films and completely cede production control and marketing rights to the films.
For example, a manufacturer may acquiring a competing manufacturing firm to better enhance its process, labor force, and equipment. Vertical integration is often undertaken to have better control over a long process, while horizontal integration is more suitable for a company wanting to become more niche for something specific. Horizontal integration often entails similar companies coming together, while vertical integration often entails different companies related to a similar product coming together. Procter & Gamble’s 2005 acquisition of Gillette is a good example of a horizontal merger that realized economies of scope. Because both companies produced hundreds of hygiene-related products from razors to toothpaste, the merger reduced the marketing and product development costs per product. The examples show that, in many cases, horizontal integration pays off as those involved can widen their reach and eliminate weaker competitors.
This company wanted to strengthen its position in the social sharing space and saw the acquisition of Instagram as a huge opportunity to achieve this. Hence, in this regard, Instagram was acquired by Facebook in 2012 for a reported $1 billion but still operates independently as its own social media platform. Facebook acquiring an up-and-coming competitor, like Instagram is a typical example of horizontal integration in the social media industry. This is one of the well-known horizontal integration examples in the automobile industry because Volkswagen and Porsche both operate within the industry of motor vehicle manufacturing.
This enables Tata to manufacture low-value, flat and long steel products, wherein Corus manufactures stripped products of high-value. This acquisition enabled Google to control the whole ecosystem of electronic devices not covered by Apple. The two decades leading horizontal integration example that led to the global financial crash in 2008 were characterized by massive consolidation in the banking industry. The notorious epitaph that banks were ‘too big to fail’ was ultimately the consequence of unprecedented M&A activity in commercial banking.
- Where horizontal integration helps to reduce competition and drive up sales for the company, vertical integration seeks to increase competition in order to drive sales.
- As both companies compete with each other on the same level of the supply or value chain, developing economies of scale is possible by combining their operations.
- Tata Steel became the world’s 5th largest steel producer after this acquisition.
- The most important factorfor horizontal integrations to work is the presence of economies of scale.Without them, there is little value to be created in joining firms together.
Merger is the joining of two similar sizes, independent companies to make one joint entity. Hostile takeover is the acquisition of the company, which does not want to be acquired. Horizontal integration’s control over one process during production means that a company has established a dominance in the manufacturing, selling and distribution, or even the production of raw materials. If a company owns every bit of a production process then it is known as a horizontal monopoly. Horizontal Integration was made famous by John D. Rockefeller’s Standard Oil company.