17 Jul Horizontal and Vertical Acquisition: Differences, Similarities, and Examples
There are numerous ways to grow a company. Where mergers and acquisitions (also known as inorganic growth) are concerned, there are two transaction types to pursue: a horizontal or vertical acquisition. While they’re somewhat different in their aspects, both types of mergers may have positive, meaningful effects on companies looking for an aggressive growth strategy. Depending on a business owner’s goals, there are benefits and drawbacks to both methods. Here, you’ll learn about vertical and horizontal mergers, their differences, some examples, and a few alternatives.
What is a Vertical Merger?
The objective of a vertical acquisition or merger isn’t to directly increase revenue. Rather, the goal is to reduce costs and improve the company’s efficiency, with the result being a substantial competitive advantage. A vertical merger often involves a company purchasing a distributor, a supplier, or another part of the supply chain to put the components under one entity’s control.
For instance, a seller of luxury consumer goods may buy the factory that makes the items, or at the other end of the chain, the stores that sell them. In controlling the supply chain from beginning to end, a vertically-integrated company is more easily able to control price and production. This strategy has been employed with great success by luxury handbag designer Louis Vuitton, and that’s why those famous bags don’t go on sale.
By purchasing the companies they use at different points in the production process, businesses not only gain control of the supply chain, but they also reduce the time required to locate and negotiate with various parties. A vertical merger may also reduce expenses by ensuring the unity of distribution and production so there are no shortages or surpluses of goods. Along with the benefits mentioned here, a business may undertake a vertical merger to gain control over inputs. For instance, if manufacturers use components that few companies provide, buying those suppliers will ensure continual access while increasing the competitive advantage.
Horizontal Mergers and How They Work
The goal of a horizontal acquisition has a straighter path to a company’s bottom line, helping it to increase its market share or broaden its product offerings. In horizontal mergers, companies buy other businesses within the industry’s value chain (it may be a complementary or a competitive business). With frequent acquisitions, companies can easily expand current operations rather than forming new ones.
You may see the purchase of lynda.com, a web-based skills development and learning platform, by LinkedIn, the world’s widest professional social media network, as a horizontal acquisition. LinkedIn broadened its customer base by reaching those seeking new professional opportunities—and widened it even further by offering career development services when it acquired lynda.com.
An acquiring company may decide that it is a better deal to add a firm already offering complementary services and products than to invest the human resources, money, and time in developing such offerings themselves. A horizontal merger is one effective way to quickly tap into new markets, especially if the target firm has distribution centers or customer bases in different regions.
Possibly even more evidently than in vertical acquisitions, horizontal mergers may significantly increase a firm’s competitive stance in the market, either by eliminating rival companies or by allowing the firm to provide higher-value offerings than those competitors do. In fact, some companies pursue such strategies for this very reason.
Vertical Acquisition vs. Horizontal Acquisition and Self-Sufficiency
One of the biggest differences between vertical and horizontal acquisitions is in the extent of their self-sufficiency. Would an owner rather make their own components, or assemble their products via a third-party vendor? Horizontal acquisitions focus on the latter, while vertical mergers deal with the former. With vertical acquisitions, owners have more control over the distribution and production processes, and they gain a greater competitive advantage. However, gaining the upper hand can be time-consuming and costly.
Which is Better: A Horizontal or a Vertical Merger?
There’s no firm answer to this question, as business owners must consider their growth goals when deciding which strategy to pursue. While both types of mergers offer substantial benefits, company owners should remember that such transactions are only successful if the combined company is strategically and seamlessly integrated. The subject of acquired company integrations is one for another guide, but if a business owner wants to elevate their competitive position, cut costs, boost efficiency and increase their bottom line, considering the benefits of a horizontal or vertical acquisition is a worthwhile endeavor. With careful evaluation of the pros and cons, business owners will find it easier to make informed decisions.