Aside from company expansion and eliminating competition, a horizontal merger and acquisition (M&A) is so much more than this. Down the line, it strengthens the new company’s market position and customer reach. But how does a horizontal merger and acquisition work and is it more beneficial compared to other M&As strategies?
What is a horizontal merger and acquisition?
A horizontal merger and acquisition happens when companies from the same industry merge, or when a company acquires another that operates within a similar industry. Common among these two is that the target company is in the same stage of production as that of the purchasing company. In most cases, the two companies produce identical products, which also compete in the same market.
Horizontal M&As are just one of the M&A strategies, aside from the following:
- vertical
- conglomerate
- market extension
- product extension
Here’s a video that explains the key differences between a vertical and a horizontal M&A:
To know more about what happens in a horizontal merger and acquisition, you can consult the best M&A lawyers in Canada as ranked by Lexpert.
What is the difference between vertical and horizontal merger and acquisition?
Vertical M&A, on the other hand, is the merging of two companies that are involved in the same production line for a similar product or service. Here are the differences and similarities between a vertical and a horizontal M&A:
- subject companies doing the M&A: horizontal M&As involve competing entities that supply the same products or services, while it’s not necessarily true for vertical M&As as it happens between companies in different stages of production
- lessening of competition: this happens in horizontal M&As when the two companies overlap in their operations, while it occurs in vertical M&As when it prevents competitors from accessing inputs to the same production line
- regulation and applicable laws: while horizontal M&As are most likely anti-competition in nature, Canada’s competition laws do not make any distinction between vertical and horizontal ones, since both are equally covered
What are the benefits and challenges of a horizontal merger and acquisition?
Aside from knowing the difference between the M&A strategies, it’s important to see the benefits and challenges of horizontal M&A itself. Knowing them will help companies involved in a future M&A transaction determine what is fitting for their case.
Benefit: Rule out competition
The most sought-out feature of horizontal M&As is the acquisition of competitors. After a successful M&A process, the previously competing companies are now stacked into a single entity. This may overpower the market for its service or products, since there’s absolutely no, or at least minimal, competition anymore. After all, this is the very objective of horizontal M&As—moving competitors out of the way.
Challenge: Application of competition law
However, because of the risk of forming monopolies after a horizontal M&A occurs, competition and antitrust laws may come into play. For instance, when certain thresholds are reached by the M&A transaction, it must undergo certain mandatory review procedures. Otherwise, it can be legally invalidated. Crucial on this matter are Canada’s regulatory bodies, such as the Competition Bureau and the Competition Tribunal, which implements the country’s competition laws. As such, there can be restrictions when it comes to horizontal merger and acquisition in Canadian jurisdiction.
Negative effect to smaller businesses
This double-edged sword of eliminating competition in horizontal M&A also affects those downstream, such as the smaller, local businesses. As horizontally merged companies continue to grow exponentially, these small businesses are affected either because:
- they also become at risk of getting acquired by their larger competitors, or
- they cannot compete with these large companies in the same market anymore
Benefit: Improved revenue share
Because competition among companies is avoided, the target consumers have less options to choose from and are now more likely to patronize the acquiring or resulting company. There’s also the chance that the current customers of the target company will support the new company. This will expand the acquiring or resulting company’s territorial and geographical extent. All of these put it at an advantage that will secure its constant flow of revenue.
Technology transfer among competitors
Another factor that will help increase the revenue of the new company is the transfer of technology. When two competitors merge, their skills and resources are shared to benefit the new company. This may also lead to lessened costs for the product or service production of the new company.
Challenge: New company’s imbued reputation
However, as with any other business deals, there would always be ongoing risk. In horizontal M&As, that would be if the parent companies have a bad reputation that can be carried over to the new company. When either the target or acquiring company (or even both) has a negative standing, this will surely affect the new company. No matter how big the share of the new company is in the market, this bad reputation, even if it’s only inherited, will affect the company’s performance along the way.
What are examples of a horizontal merger and acquisition?
In recent years, there have been a lot of horizontal acquisitions. One of the modern examples is the horizontal acquisition by Facebook of Instagram in 2012 and WhatsApp in 2014. All three are in the same industry of social media and/or telecommunications, operating in a similar market, and targeting the same consumers.
The Rogers-Shaw merger
An example of a horizontal merger in Canada would be the highly contentious merger of Rogers Communications and Shaw Communications, whose deal was sealed in 2021. The total amount for this M&A transaction was $26 billion, which makes it one of the largest M&A deals in Canadian history. However, it was not all easy-breezy for the Rogers-Shaw merger, after a challenge was lodged by the Competition Bureau to prevent the deal’s completion. The regulator contended that such merger would decrease competition in the Canadian telecommunications industry. In the end, the transaction was completed in 2023, when the Competition Tribunal and the Federal Court of Appeal decided against the Bureau.
In sum, whether a vertical or horizontal strategy is appropriate for a transaction would depend on a lot of factors. This is why it’s crucial to consult first with an M&A lawyer before choosing which M&A strategy the parties should push through.
Undergoing a horizontal merger and acquisition? Hiring the services of the best Canadian law firms for M&As would be the first and most important thing to do.