A horizontal acquisition occurs when a company acquires another company operating in the same industry and often at the same stage of production. This type of acquisition is a strategic move aimed at enhancing market power, operational efficiencies, and economies of scale.
Definition
Horizontal Acquisition: The purchase of a company by another company within the same industry that provides similar or complementary products or services. This is distinct from vertical and conglomerate acquisitions, which involve different types of industries or stages of production.
Mechanism of Horizontal Acquisitions
Identification and Selection
The acquiring company identifies potential target companies that could provide strategic benefits such as expanded market share, reduced competition, or additional resources and capabilities.
Negotiation Process
Negotiations are conducted to determine the acquisition price, structure, and terms. These discussions include aspects like stock exchange, cash purchase, or a combination of both.
Due Diligence
Due diligence is performed to thoroughly evaluate the target company’s financial health, operational efficiency, market position, and potential liabilities.
Acquisition Announcement
Once terms are settled, the acquisition is publicly announced, and regulatory approvals are sought if necessary. This announcement can affect stock prices and market sentiments.
Integration
The final phase involves the integration of the acquired company into the acquirer’s existing operations. This stage aims to harmonize business processes and achieve the desired synergies.
Example of a Horizontal Acquisition
A quintessential example of a horizontal acquisition is the merger between The Walt Disney Company and 21st Century Fox. This acquisition, completed in 2019, allowed Disney to significantly expand its content portfolio and bolster its position in the entertainment industry.
Types and Considerations
Types
- Friendly Acquisition: Both companies agree mutually on the acquisition terms.
- Hostile Acquisition: The target company does not consent to the acquisition, leading the acquiring firm to approach shareholders directly.
Special Considerations
- Regulatory Approval: Horizontal acquisitions may require antitrust approvals to ensure fair competition within the industry.
- Cultural Compatibility: Aligning the corporate cultures of both companies is crucial for a smooth integration and realizing the potential benefits.
- Financial Evaluation: Comprehensive financial analysis ensures that the acquisition is economically viable and beneficial.
Applicability and Benefits
Horizontal acquisitions are applicable across various industries, particularly where market consolidation can enhance competitive advantage, such as in the technology, pharmaceuticals, automotive, and consumer goods sectors.
Key Benefits
- Increased Market Share: Expanding the customer base and consolidating market leadership.
- Operational Synergies: Streamlining operations to reduce costs and improve productivity.
- Diversification: Broadening product lines and gaining access to new markets and customer segments.
Related Terms
- Merger: The combination of two companies to form a new entity.
- Vertical Acquisition: An acquisition of a company operating in a different stage of the same industry.
- Conglomerate Acquisition: Acquiring a company in a completely different industry.
FAQs
What is the main purpose of horizontal acquisitions?
Are there risks involved in horizontal acquisitions?
How is a horizontal acquisition different from a merger?
References
- Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance.
- Walt Disney Company
Summary
Horizontal acquisitions are strategic moves where companies within the same industry consolidate their operations to enhance market power, operational efficiency, and achieve economies of scale. These acquisitions can be complex, necessitating careful strategic planning, regulatory considerations, and effective integration for success.
