When you study mathematics you come across the concept of horizontal line, it refers to joining two points and making a straight line. In finance horizontal merger refers to those mergers in which two companies which are operating in the same industry merge and therefore instead of competing with each other under horizontal merger they decide to merge and become one entity. Some examples of horizontal merger are two cement companies merging with each other or two IT companies merging with each other or two mobile companies merging with each other. Given below are the advantages and disadvantages of horizontal merger –
Advantages of Horizontal Merger
- The biggest advantage of horizontal merger is that it reduces the competition by reducing the number of companies which are there in the industry and hence company has to spend less time on taking undue stress about how to tackle competition and can concentrate more on improving its product and giving the customer best services by producing good quality product at lowest price.
- Horizontal merger give companies benefit of economics of scale because as size of company increases price per unit of production for product decreases as there is elimination of duplication of machinery, increase in bargaining power with suppliers due to massive size of merged company, less expenditure on advertising and publicity leading to company delivering the product at lower price to its customers than before.
- It is easier for top management of the acquiring company to manage the target company which is in the same business rather than acquiring taking over that company which has completely different business and hence chances of top management successfully handling both the companies increases in case of horizontal merger.
Disadvantages of Horizontal Merger
- The biggest disadvantage of this type of merger is that it increases the chances of merged company having monopoly powers due to sheer big size of merged company and we all know that a company having monopoly powers will tend to exploit customers by charging higher price than normal from its customers and hence in the end it is the customer who has to suffer.
- Another disadvantage of this type of merger is that it is difficult to integrate the culture, employee behavior and other such things of two companies which are merged and if company is unable to achieve the integration then the whole idea of merging two businesses will go out of window and it will result in failure of the merged entity.
- Horizontal merger results in company putting all its egg in one basket implying that if the product which is being sold by the company go out of fashion as is the case with technological products or if there is some government policy which makes production of product unattractive as is the case with mining products. Hence a company doing horizontal merger is basically investing all its wealth or cash into one business and there is no diversification and can cost the company big time if above mentioned situation arises.