DEFINITION: The phrase “horizontal integration” refers to the acquisition of a company within the same industry in the same country.
In other words, in the case of horizontal integration—as opposed to vertical integration—the acquiring company and the company acquired are both in the same line of business.
ETYMOLOGY: The phrase “vertical integration” was probably coined around the turn of the twentieth century. The practice was made famous by the consolidation of the petroleum production industry by John D. Rockefeller, Sr.
The English adjective “horizontal” is attested from the mid-sixteenth century. It is formed from the noun “horizon,” which derives, via Middle English orizon, from Late Latin horizon, which, in turn, derives from the Greek past particple horizōn, horizontos, meaning “boundary,” of the verb horizō, horizein, meaning “to divide.” The latter verb is formed from the noun horos, horou, meaning “boundary,” “limit,” or “border.”
The English noun “integration” is attested from the early seventeenth century. It is formed from the verb “to Integrate,” which is derived from the Latin past participle integrates ofthe verb integro, integrare, meaning “to make whole.”
USAGE: Horizontal integration is a competitive strategy whose primary purpose is to create economies of scale.
Consolidation makes it possible for a company composed of two formerly independent businesses to generate greater revenues than the two companies could have generated by operating independently.
Horizontal integration enhances a company’s market influence over both suppliers and distributors, which stimulates product differentiation and market expansion, or entry into new markets.
On the other hand, horizontal integration may hurt consumers, particularly if the consolidation results in reduced competition. For this reason, regulators subject horizontal mergers to intense scrutiny to determine if they infringe antitrust laws.
The principal motivation for horizontal mergers is company-owners’ desire to reduce the competition they face. This may derive from existing competitors, from competition from potential newcomers to the market, or from competition from businesses offering alternative or substitute products.
For the most part, horizontal integration takes one of three fundamental forms: acquisition, merger, or internal expansion.
Acquisition
An acquisition occurs when one company assumes full control over another company’s operations. While the two companies combine to create a new entity, the acquiring company maintains dominance.
In most cases, the acquiring company keeps its own executives, staff, and operational structure, while the acquired company’s executives and staff are often laid off, and its assets placed under the control of the acquiring company’s management.
Companies frequently embark upon acquisitions with a particular purpose in mind. For example, when Microsoft acquired Activision Blizzard in January of 2022, it had a precise goal in mind, namely, that of bolstering its position in the video game industry.
Merger
In a merger, two distinct and more-or-less equal companies come together to form a new, unified organization. Either a new brand name may be created or the brand of one of the pre-existing companies may be used for the new, combined entity. Usually, operations and personnel are retained from both entities and integrated together.
Moreover, both companies’ product lines are often similar and equally competitive within a particular market. Thus, in a merger, both companies are basically seeking to expand their market share.
For these reasons, most mergers involve firms that are able to integrate their similar operations in a relatively smooth fashion.
Internal Expansion
Companies may also engage in horizontal integration by shifting its focus, redirecting its resources, and reallocating internal capital expenditures toward a new goal.
For example, a candy manufacturer might decide to diversify into the production of bottled drinks, or a grocery store might choose to broaden its services to include a café or a buffet.
In these and similar instances, a company maintains its existing mode of operations. However, instead of investing its capital to acquire or merge with an external company, it opts to reallocate those resources internally for such things as staff retraining, equipment purchase, and capital investments designed to support the new line of business.