Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Perhaps, a manufacturer who buys or merges with another manufacturer, in the same industry, is an example of horizontal integration.
Horizontal integration, just like vertical integration can happen in several ways. Companies willing to expand will do that by either using their internal resources to take more space within the same part of the supply chain and within the same industry (internal expansion).
Or they might merge, by forming a single entity. Or through acquisition.
When and why horizontal expansion makes sense?
Horizontal expansion can happen for several reasons:
In some cases, companies look to dominate specific segments of a market, to retain a competitive advantage, for longer.
Growth and expansion
Horizontal integration can shortcut the growth and expansion within the same industry.
Economies of scale
In theory, horizontal integration might help the merged companies to benefit from economies of scale.
In other cases, horizontal acquisition also helps in surviving a market getting increasingly competitive.
What are the potential drawbacks of horizontal integration?
Horizontal integrations can limit competition, at the point of creating monopolies, which overall might reduce the options for consumers.
On the other hand, they also raise regulatory concerns.
Diseconomies of scale
While in theory horizontal integration can create economies of scale, in practice, from integrating two different groups in he same industry can also lead to the opposite, effect, diseconomies of scale.
The hardest part of integrating or merging companies, might be about really making it work from a cultural standpoint.
And as horizontal integration usually works by creating a new, larger group.
This renewed scale might cause cultural clashes, which are hard to overcome.
Horizontal integration case studies
Let’s see a set of horizontal integrations happened in the digital era, which might help us understand how the process has been used by current market players to expand, defend or redefine their business models.
Uber Eats’ acquisition of Postmates to stay competitive in the meal delivery industry
Uber Eats is among the largest players in the meal delivery industry. Launched by Uber, it gained traction quickly, and it became among the largest players in the US.
In July 2020, Uber announced a multi-billion dollar deal, which would enable it to be among the largest players as a result of the consolidation happening in the meal delivery industry, which leads us to the next example.
The merger between GrubHub and JustEat to create one of the largest meal delivery players on earth
In June 2020, GrubHub and JustEat merged in a deal worth over seven billion dollars to create one of the largest meal delivery players in the world.
The deal happened after Uber had been looking into the possibility of acquiring GrubHub.
That raised concerns as it would have created a monopoly in the US. At the same time, GrubHub and Uber might have not found a deal given their cultural differences.
As the deal slipped, the merger between GrubHub and JustEat got finalized.
TikTok’s acquisition of Musical.ly and its rebranding
In 2017, TikTok acquired Music.ly, and by 2018, it rebranded it within its own app to create a single platform, which scaled exceptionally quickly.
TikTok, therefore, used the acquisition of Music.ly to expand quickly.
Facebook acquired Instagram and kept it as the independent product (for a few years)
Back in 2012, Facebook acquired Instagram for a billion dollars.
What seemed expensive at the time for a mobile app that wasn’t profitable, became among the most valuable products for the Facebook portfolio.
At the time, Facebook opted for a multi-product strategy (for the first time), where Instagram was left as an independent product of the Facebook family, free to develop on its own and by slowly integrating it into the Facebook ecosystem.
Yet, over the years, Facebook tightened its clasp over Instagram, and it became part of its advertising platform. Today Instagram is the product that makes most of the revenues for Facebook, as it successfully converted to mobile.
In addition, thanks to Instagram, Facebook also managed to thrive in the coming wave of social media apps. Where Facebook had to convert its website to mobile, and it took a few years. Instagram was native to that!
Google’s acquisition of YouTube
When back in 2006, Google acquired YouTube for $1.65 billion, which seemed a disproportionate amount for a company that was so young and which burned cash at high speed.
However, since YouTube’s growth had been skyrocketing, Google tried to launch its own video division, called Google Video, yet it didn’t work.
The Google acquisition of YouTube is a great example of horizontal integration, where the company acquired a valuable asset to expand its presence in an existing market.
When the web finally moved from text to videos, Google found itself extremely well-positioned to take advantage of that!
Today, YouTube is an incredible advertising machine, which generated almost $30 billion in 2021, thus probably giving it a valuation of anywhere between $300-500 billion!
The Walt Disney Company and Pixar Animation Studios
The Walt Disney Company acquired Pixar Animation Studios in 2006 in an all-stock deal worth $7.4 billion.
The deal was part of a broader move by Disney to acquire brand-name properties and reinvigorate the company’s lackluster animation capabilities, which became less competitive as the industry went more digital.
Pixar had neither Disney’s legacy nor its brand value. But what it did possess was the technology and expertise to produce modern animation films.
The merger proved to be one of the most successful examples of horizontal integration.
Disney increased its market share and profit by combining its strong storytelling heritage with Pixar’s innovations.
United Airlines and Continental Airlines
United Airlines (then UAL Corporation) merged with Continental Airlines in an all-stock deal valued at $8.5 billion in 2010.
The merger of two of the world’s premier airlines enabled the new company to be more competitive in a dynamic and crowded aviation industry.
The resultant airline, known as United Airlines, offered services to four continents from ten hubs across the United States.
The merger also allowed United Airlines to offer enhanced services to business customers in small and medium-sized communities.
Arcelor and Mittal
Indian company Mittal Steel merged with Arcelor of Luxembourg in 2006 in a deal worth €26.9 billion.
As part of the merger, the new company would incorporate Mittal’s steel plants across four different continents and several low-cost facilities in Mexico, Kazakhstan, and the Czech Republic.
These facilities would be combined with Arcelor’s predominantly western European mills that specialized in high-grade steel production for the automotive industry
Then chairman of Arcelor Mittal Joseph Kinsch noted that the deal would create “global leadership in steel” in terms of value and tonnage.
Indeed, the new company would become a behemoth with three times the capacity of second-placed rival Nippon Steel and a 10% global market share.
Exxon and Mobil
The $75.3 billion merger of Exxon and Mobil in 1998 was, at the time, the largest merger in corporate history.
The heavily scrutinized deal gave Exxon access to Mobile’s gas stations and oil reserves, but it was also driven by a need to cut costs since an excess of crude oil had forced prices to rock-bottom levels.
Nevertheless, the merger reunited two of the most significant parts of John D. Rockefeller’s Standard Oil monopoly that was broken up by regulators in 1911.
With $203 billion in revenue, ExxonMobil became the largest corporation in the world and surpassed Shell as the largest privately-owned oil and gas company.
Smaller gasoline operators objected to the proposed merger, particularly in states such as Connecticut where Exxon and Mobile owned around 40% of all service stations.
Environmentalists were also concerned that the new company would intensify its exploration activities and exacerbate global warming.
What is horizontal integration with example?
Horizontal integration is the process of expanding the presence of company within a market by integrating at the same level of a supply chain. Take the example of Google taking over YouTube, thus expanding its market shares in the video segment. Or Facebook acquiring Instagram to horizontally cover more in the same space.
What are vertical and horizontal integrations?
Whereas in horizontal integration a company expands by acquiring other companies that move in the same space of the supply chain. In vertical integration the company moves either upstream or downstream to cover more parts of that supply chain. Take the case of Google, which in 2017, acquired a chunk of HTC’s smartphone division so it would get into the manufacturing of hardware to serve its market.
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