Horizontal Merger Definition: Purpose of a Horizontal Merger

A horizontal merger is a merger or acquisition that brings together at least two companies within the same industry to create a single conglomerate. A horizontal merger creates more efficient economies of scale and allows the merged company to decrease market share competition and increase market power. Premerger, individual companies might have difficulty breaking into new markets and will work harder to highlight their differentiation. Merging firms can ease industry competition and rely on shared synergies to focus on creating new products.

A horizontal merger can strengthen each company involved. Companies in the same market will jockey for more creative ad campaigns, specific products, and attractive price points. Horizontal merger guidelines allow companies to come together, share customer data, and more easily set pricing instead of toiling to create different products at different prices.

This type of merger allows the given industry to more closely approach an oligopoly, a kind of economy in which a few larger businesses enjoy less competition and more market freedom. Horizontal mergers are relatively common in saturated markets as they invite the consolidation of competition and revenue optimization.

Different types of mergers prioritize the profitability and efficiency of a company, but the approaches vary. An example of a horizontal merger involves merging two brands of a similar industry to create one larger company. The larger market share allows the company to spend more time and resources on its strategies instead of competing with other brands.

The market definition of vertical mergers differs; vertical integrations consolidate various supply chain points and products, streamlining the production process and distribution to create an internal conglomerate merger. This gives the brand a competitive advantage because it can control different stages of creation and sales channels to cut costs more effectively and reach a customer base.

Mergers and acquisition transactions may work in the following manner:

• Due diligence: M&A deals usually begin with a letter of intent from the acquiring company, summarizing the transaction details. The letter is not a binding agreement, but it may contain a confidentiality exclusivity agreement between the two parties that allows lawyers, tax advisors, and other professionals to begin the due diligence process. Once due diligence is complete, the legal team will draw up a merger agreement outlining the merger or acquisition conditions and any regulatory filings regarding shareholder approval.
• Valuation: The acquiring company can determine an objective valuation through several metrics, including offers based on multiples of the target company’s earnings or revenues or discontinued cash flow (DCF), which determines a company’s value by estimating future cash flows. The acquiring company may also use an EBITDA formula—short for “earnings before interest, taxes, depreciation, and amortization”— to determine the company’s profitability.
• Negotiation: Dealmakers from the acquiring company present their M&A deal to the target company, whose chief financial officer (CFO) will review the deal value for potential risks and rewards and then present it to the chief executive officer (CEO) for signature. Both the buy-side and sell-side of the deal may consult investment bankers and representatives from law firms for financial and legal advice during this stage.
• Financing: Acquiring companies can finance mergers and acquisitions using cash, stock, or the target company’s debt assumption. The purchase of a company from cash borrowed from private equity firms, investment banks, or other financial services is a leveraged buyout. Once the parties agree on the purchase agreement and sign the deal, it’s officially closed.
• Integration: Depending on the nature of the merger and acquisition, the acquiring company or newly merged companies may begin restructuring the new entity or integrating both companies’ cultures and responsibilities. Shareholders may note a drop in share value and a dilution of voting power following the merger due to an increase in the number of shares created by the merger.

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