What it means
A merger is described as horizontal when the two parties are direct rivals: two regional coffee chains, two payroll software vendors, two cement producers. The test is simply whether both sit at the same level of the value chain, rather than one supplying the other, which would make the deal vertical instead.
The business case usually rests on cost savings that finance people call synergies. Two head offices become one, overlapping sales territories are merged, duplicate warehouses are closed, and the combined firm buys raw materials or advertising in larger volumes at better rates.
There is often a revenue argument too. The buyer may want the target's customer list, its distribution in a region it cannot reach, or a brand that sits at a different price point, so that the combined group can sell more to the same people.
Regulators care because removing a competitor can reduce choice and push prices up. Competition authorities typically look at how concentrated the market becomes after the deal and may block it, or approve it only if the merged group sells off certain branches, brands or contracts first.
The nuance that catches buyers out is that horizontal deals look easiest on paper and are frequently hardest in practice. Two similar businesses have two similar sets of systems, two cultures and two teams doing the same job, and deciding whose way wins is where the promised savings are either delivered or quietly lost.
In practice
Real-world examples.
Example
Two mid-sized regional bakeries with neighbouring delivery routes merge. They keep both brands on the packaging but close one of the two production sites, cutting overtime and van mileage while supplying the same supermarkets.
Example
A cloud accounting provider buys a smaller rival with an almost identical product. The plan is to migrate the smaller firm's 40,000 subscribers onto the buyer's platform within eighteen months and retire the second codebase.
Example
Two national gym chains announce a merger. The competition regulator approves it only after the parties agree to sell twelve clubs in cities where the combined group would have owned every large gym in the centre.
Formula
Calculation
There is no single formula, but the two numbers negotiators focus on are combined market share and expected cost synergies.
Combined market share = (Revenue of A + Revenue of B) / Total market size
Suppose the national market for commercial laundry services is worth $2,000,000,000 a year. Company A has revenue of $260,000,000, giving it a share of $260,000,000 / $2,000,000,000 = 13%. Company B has revenue of $180,000,000, giving it a share of 9%.
Combined revenue is $260,000,000 + $180,000,000 = $440,000,000, so combined market share is $440,000,000 / $2,000,000,000 = 22%.
On the cost side, the two firms currently spend a total of $30,000,000 a year on head office functions. Management believes one head office can run the combined group for $18,000,000, so the annual cost synergy is $30,000,000 - $18,000,000 = $12,000,000. If one-off integration costs are $20,000,000, the payback period is $20,000,000 / $12,000,000 = 1.67 years.Case study
Seen in the real world.
This is an illustrative, fictional example. Northfield Tyres and Calder Auto Centres each ran roughly ninety fitting bays in the same three regions and each earned thin margins fighting the other on price. Their boards agreed a horizontal merger, arguing that combining purchasing would improve tyre buying terms by 6% and that closing eleven overlapping sites would save $9,000,000 a year.
The purchasing saving arrived quickly because the combined group placed one order instead of two. The site closures were slower, because leases had years left to run and the two companies used different booking systems, so customers of the closed branches could not easily be moved to the surviving one.
By year three the group had captured most of the promised savings, but only after spending more on systems integration than the original plan allowed. The lesson the fictional board drew was that in a horizontal merger the buying synergies are the easy part and the operational ones need their own budget and timetable.
Watch out
Common mistakes.
- Assuming a horizontal merger automatically means lower costs, when duplicate systems, redundancy payments and integration projects can absorb the savings for two or three years.
- Confusing a horizontal merger with a vertical one; buying your supplier or your distributor is vertical, buying your competitor is horizontal.
- Treating regulatory approval as a formality, when in concentrated markets the remedies demanded can strip out the very assets that made the deal attractive.
Questions
People also ask.
Is a horizontal merger the same as an acquisition of a competitor?
In substance yes; the word merger implies a combination of equals, but most deals labelled mergers are really one company buying another.
Why do regulators dislike them more than other deals?
Because removing a direct competitor reduces the number of choices customers have, which can allow prices to rise without customers being able to walk away.
How is success usually measured afterwards?
By whether the promised cost synergies actually appear in the combined income statement, and by whether the merged group kept the customers both firms had before the deal.
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