The Role of Horizontal Integration in Maximizing Market Share and Beyond

Horizontal integration is a type of M&A transaction that occurs when similar companies operating in the same industry at the same stage in the supply chain merge. Typically, firms see these deals as consolidation plays by firms to merge entities and gain market share. DealRoom has helped hundreds of organizations with their post-merger integration management. This article draws from the insights gained through our experience with these agreements.

Read on to learn more about horizontal integration, how it works, its advantages, disadvantages, and more.

Types of Horizontal Integration

To strengthen their market presence and competitive positions, companies will execute one of three horizontal integration transactions–mergers, acquisitions, or internal expansion. The differentiation between each strategy offers distinct advantages, whether combining forces with another company, acquiring a competitor, improving corporate finances, or expanding operations from within. Understanding these different types of horizontal integration is key to navigating the complexities of industry consolidation and leveraging growth opportunities.

Mergers

A merger occurs when two or more companies of equal size join to create a new organization. An often-cited example is the 1998 $80 billion merger of oil giants Exxon and Mobil. With the sum of its components, the resulting company, Exxon-Mobil, gained and still has immense market power.

Acquisitions

An acquisition occurs when a company buys another firm and folds its operations into its own. From the 1970s onwards, Santander’s acquisition of multiple regional and national banks helped the company become a global retail banking giant.

Internal Expansion

Internal expansion occurs when a company reinvests its capital. This business strategy doesn’t involve M&A but rather new product developments or investment in existing activities, such as geographic expansion. Take Samsung. The South Korean appliance and consumer electronics company expanded its operations to over 200 countries to reach new markets and broaden its now global customer base.  

Horizontal Integration Examples

Horizontal integration is a real-world corporate strategy that some of the world’s largest and most well-known companies pursue. The examples below each represent one of the three types of horizontal integration: a merger, acquisition, and internal expansion.

Bank of America

The two decades leading to the 2008 global financial crash were marked 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.

Bank of America was born in this wave of mergers and acquisitions when Nations Bank horizontally merged with Bank of America in 1998 in a $62 billion deal. The company’s CEO admitted that scale was a motivating factor.

“Scale is indeed better,” he said, declaring the nearly formed entity as “America’s bank at home and all around the world.”

Shortly after that, the combined bank—with assets valued at over $500 billion—changed its name to Bank of America. Its holdings are now worth approximately six times what they were. Still, notably, the company’s share price (using BankAmerica’s share price in 1998 as a reference) is remarkably close to where it was all those years ago.

CVS

‍Scale is a powerful tool in the arsenal of pharmacy chains because it means they can pressure pharmaceutical manufacturers for more favorable prices. The biggest pharmacy chain in the United States, CVS, achieved scale through acquisitions of smaller local, regional, and national pharmacy chains.

In 2006, CVS announced it had acquired 700 drugstores trading under the names Osco Drug and Sav-On Drug from Albertsons. Already the largest drugstore chain in the country, the extra stores acquired in the deal gave CVS control over 6,000 drug stores across 42 states and the District of Columbia.

The deal was just one of a series of transactions the company conducted to achieve that level of scale. Since then, the company has moved into vertical mergers, acquiring several technology and pharmaceutical services firms, but the Albertsons deal was the biggest horizontal acquisition CVS has ever made.

United Parcel Service (UPS)

‍Internal expansion, sometimes called “organic growth,” is the process by which companies mature through reinvesting profits to increase their asset base, profile, potential, and product offerings, creating a virtuous cycle that leads to more profits. It’s a growth strategy often followed by an M&A transaction.

The United Parcel Service (UPS) is an example of a successful internal expansion. The company’s most significant acquisitions have invariably been in warehouses and distribution centers, ensuring it has the footprint to deal with the expanding e-commerce market. It has reached nearly $100 billion in annual revenues by doing so.

Horizontal Integration vs. Vertical Integration

Like horizontal integration, vertical integration is a business strategy, except here, the company obtains a business that services different stages of the production process or supply chain—a sock manufacturer acquiring a hosiery distributor.

There are two basic types of vertical integration: backward and forward integration:

The first, backward integration, occurs when a company purchases a business that produces an input product for the acquiring company's product–a fast fashion clothing distributor acquiring a fabric manufacturer. Forward integration involves a company taking control of some aspect of the post-production process–the distributor acquiring a retailer to sell the clothing it produces.

In theory, at least, vertical integrations are more challenging to execute than horizontal integrations because they force companies into different areas of expertise and new competencies and can even create adverse outcomes around innovation and competition.

Horizontal Integration vs. Horizontal Monopoly

A horizontal monopoly involves horizontal integration to the point that the combined businesses entirely or nearly completely control a specific step in the supply chain. The company will likely fall under regulatory scrutiny in these cases, as creating a horizontal or vertical monopoly is usually considered an illegal business transaction.

De Beers Group

For nearly 100 years, the De Beers Group monopolized the diamond industry via horizontal and vertical integrations. The company controlled everything from diamond and raw material mining and sourcing to refinement, distribution, and retail. However, the organization began to lose market share starting in the 1980s due to increased crackdowns by regulatory agencies and changing consumer preferences.

In 2004, the United States Department of Justice ordered the company to pay $10 million after it pleaded guilty to illegally fixing diamond prices. As of 2022, this clash reduced their market share from approximately 29% to what was 85% in the 1980s.

When Does Horizontal Integration Make the Most Sense?

A merger via horizontal integration would benefit rival companies operating in the same industry. Corporate leadership teams generally pursue this type of transaction when it’s likely to result in economies of scale or, alternatively, economies of scope.

Horizontal integrations are popular in industries like banking, food, retail, and even the automotive industry, where their scale offers a competitive advantage. For a horizontal acquisition to be profitable, several factors must be present:

Economies of Scale

As stated above, M&A teams will seek this kind of deal if there are economies of scale, as the increased production must lead to significant cost advantages across the value chain.

Increased Market Share

Some industries—particularly banking—benefit from having a larger market share, which translates into greater visibility for clients, higher levels of credibility, and even systemic importance, which is how we got the phrase “too big to fail.”

The dynamics of many industries mean that the market can only support three to four large companies. As a result, horizontal integrations become a popular means of acquiring market share.

Regulatory Flexibility

Anti-monopoly commissions tend to be more lenient on specific industries. Horizontal integrations are more likely if one sector is outside the regulator’s focus. For example, the 2023 merger of Elance and O Desk was far removed from any regulator’s scope or attention, though it created a giant in the online freelancing industry.

Management Openness

Horizontal integrations are more effective when the target company’s management team is willing to negotiate or can see merit in the deal. This leads to more productive conversations, increased buy-in, and fewer chances for the buyer to overpay to force the transaction through.

What Are the Potential Advantages and Disadvantages of Horizontal Integration?

Merging with or acquiring companies through horizontal integrations offers a range of potential benefits and disadvantages. Understanding both is crucial for businesses implementing these tactics to maximize their strategic outcomes.‍

The Advantages

The potential benefits of horizontal integration include:

• Combine Market Share: Horizontal integration typically results in a combined new company with a larger combined market share than the individual firms had separately.
• Increased Bargaining Power: Larger companies benefit from economies of scope, often gaining more leverage in negotiations with suppliers and reducing per-unit costs.
• Less Competitors: The consolidation eliminates rivals, resulting in less market competition for the newly formed company.

The Disadvantages

Still, horizontal integration comes with a set of challenges as well, such as:

• Portfolio Diversification: Although scaling up can provide benefits, concentrating capital in a single area can be risky to the entire business.
• Antitrust Laws: Horizontal integrations often attract the scrutiny of regulatory agencies, who assess whether the merged entity might gain excessive market power and potentially breach anti-monopoly regulations.
• Price Gouging: Companies frequently overpay for horizontal acquisitions, viewing them as unique opportunities or their only opportunity to achieve the desired scale.

How Horizontal Integration Relates to Business Profitability

A highly cited 1999 academic article on the long-term performance of horizontal integrations examined over 250 horizontal M&A transactions and found that acquisitions of this kind generate above-market returns. Analysis conducted by McKinsey also showed that of the six types of successful acquisitions, three can be attributed to horizontal integration strategies: improving the target company’s performance, consolidating to remove excess capacity from the industry, and accelerating market access for the target’s or buyer’s products.‍

DealRoom provides an end-to-end solution to support every aspect of horizontal and vertical integrations, ensuring you can navigate the complexities of M&A confidently and precisely. Transform your company and find out how to add value to your transaction by scheduling a free demo today.