When you study mathematics you come across the concept of the horizontal line, which refers to joining two points and making a straight line. In finance horizontal merger refers to those mergers in which two companies that 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 mergers 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
Reduction in Competition
The biggest advantage of a horizontal merger is that it reduces the competition by reducing the number of companies which are there in the industry and hence the 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 a good quality product at the lowest price.
Economics of Scale
Horizontal mergers give companies the benefit of the economics of scale because as the size of the company increases the price per unit of production for a product decreases as there is the elimination of duplication of machinery, increase in bargaining power with suppliers due to massive size of the merged company, less expenditure on advertising and publicity leading to a company delivering the product at a lower price to its customers than before.
Easy to Handle
It is easier for top management of the acquiring company to manage the target company which is in the same business rather than acquiring company taking over that company which has a completely different business and hence chances of top management successfully handling both the companies increases in case of a horizontal merger. In simple words just if you have to teach two students studying in two different classes then you will have some difficulty but if you have to teach two students who are studying in the same class then it will be much easier for you to handle both students same thing applies to horizontal merger also.
Disadvantages of Horizontal Merger
Creation of Monopoly
The biggest disadvantage of this type of merger is that it increases the chances of the merged company having monopoly powers due to the sheer big size of the merged company and we all know that a company having monopoly powers will tend to exploit customers by charging a higher price than normal from its customers and hence in the end it is the customer who has to suffer.
Difficulty in Integration
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 the company is unable to achieve the integration then the whole idea of merging two businesses will go out of the window and it will result in failure of the merged entity.
Lack of Diversification
Horizontal merger results in the company putting all its eggs 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 that makes the production of product unattractive as is the case with mining products. Hence a company doing a 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 the above-mentioned situation arises.
As one can see from the above that a horizontal merger has advantages as well as advantages and that is the reason why any company thinking of doing a horizontal merger should carefully read the above points and then only should take any decision regarding whether to go for a horizontal merger or not.