In modern business, it is not uncommon to meet the practice when two companies merge into one to use each other’s resources and thereby increase their productivity. When the merger takes place, the companies become one, sharing their employees, assets, trade secrets, and much more. But there are two types of mergers, vertical and horizontal, and although they both involve combining two companies into one, they have their differences, and in this article, we will outline them.
What is a horizontal merger?
A horizontal merger is a type of merger where companies in the same industry merge for no financial gain, this transaction has almost nothing to do with money directly. It is done to increase its competitiveness on the market, expanding its customer base and increasing its market share.
There are a lot of examples of horizontal mergers in the history of business, and to better understand how horizontal mergers work, we can consider an example. In the early 2000s, two banks – JP Morgan and Chase Manhattan Bank – merged their operations, after which they became one of the six largest banking organizations.
What is a vertical merger?
A vertical merger implies the integration of two companies that, although they operate in the same industry, but are involved in different services or products in the supply chain to eventually market their final product. This type of merger, as a rule, is carried out to improve the efficiency of the company and increase the profit of the buying company.
Such a transaction does not directly increase the competitiveness of the company but increases its importance and influence, which may later lead to a decrease in competitiveness.
An example of a vertical merger could be a company in the automotive industry or any other industry. If an automobile manufacturing company could merge with the companies that provide individual parts for automobiles, it would be able to control the price that other companies set for this or that product. Thus, the creation of each car would bring him increased profits. In a vertical merger, the more companies an entrepreneur can join, the better.
The main difference between the horizontal and vertical merger
Below we outline the main difference between horizontal and vertical mergers based on the following criteria:
A horizontal merger implies the merger of two or more companies that are involved in the same activity, and maybe earlier were even competitors.
A vertical merger is the integration of companies that work in the same field but provide different services in the supply chain, after the merger they complement each other and each has an advantage
- The nature of the companies involved
In the case of a horizontal merger, all the companies must work in the same field and provide the same services, so that after the merger, there is an expansion of the company which entails the merger of two market shares of these companies into one
In the second case, the companies must necessarily provide different services and products, but must nonetheless operate in the same industry.
Horizontal mergers occur when companies want to increase their credibility in the market and expand their customer base
The purpose of a vertical merger is to increase profits, reduce costs, and improve company performance
In a horizontal merger the synergies occur, the resources of the company are merged into one and as a result, the companies have the opportunity to innovate, scale the business together and expand the customer base.
The advantage of the vertical merger is an increase in quality of the production and considerable economy on expenses.