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What is a Horizontal Merger?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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A horizontal merger is a business merger in which the two companies are involved in the production of the same types of goods and services. Often, a merger of this type takes place as part of a strategy to command a larger share of the available consumer market by combining the strengths of each company into one central entity. At times, a merger of this type will also take place as a means of minimizing the number of competitive firms within a given industry.

When undertaken as a means of capturing greater market share, a horizontal merger is likely to include two businesses that have similar values in terms of quality, customer service, and general operating philosophy. Often, each company involved with the merger will possess identifiable strengths that the other lacks to some degree. For example, one business may have up to date production facilities that are capable of producing a higher amount of finished goods per day, while the other business has a transportation and delivery network that is the best in the industry. By structuring the newly unified company to take advantage of those strengths, the business is likely to generate profits above and beyond those of the two pre-merger entities, and capture a greater share of the marketplace than either could have managed alone.

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There are situations where a horizontal merger takes place not as a means of building a stronger unified company, but as a means of eliminating competition. For example, a larger business may choose to merge with an up and coming business that has recently attracted a lot of attention and a decent amount of market share. The merger allows the larger business to obtain control of the patents related to the products of the smaller entity, operate it as a subsidiary if desired, and thus prevent the up and coming company from growing into a major competitor. While technically more of an acquisition, it is not unusual for this type of strategy to be identified as a horizontal merger, if for no other reason than to generate positive public relations.

A horizontal merger can provide benefits for consumers, as well as increase the potential for some liabilities. On the one hand, the merger could lead to the production of a higher quality of goods and services, allowing consumers to receive more satisfaction from their purchases. At the same time, the horizontal merger could create a situation where consumers have less options when it comes to selecting goods and services, thus forcing consumers to settle for less than what they really want.

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