A horizontal merger takes place when two (or more) competing firms offering similar product lines or services combine to form an enlarged entity. It is not necessary that the firms be in the same geographic area. This business strategy has existed for a long time, in fact perhaps the most famous example of a horizontal merger is the creation of U.S. Steel by J.P. Morgan.
The term is contrasted with vertical merger which involves the integration (either forward or backward) of another firm in the value chain so as to increase control over the sourcing of materials or control the access to markets.
Horizontal Mergers in Practice
These mergers are more common in industries with fewer competitors. Since competition among fewer companies tends to be higher, the goal is to create a larger business with greater market share and economies of scale and exploit the synergies. This may attract the attention of the appropriate regulatory bodies as the potential for monopolistic practices are investigated. It is extremely important the merger arbitrageur is aware of any HSR, CMA or SAMR issues as required. For a complete reference source of these institutions, see our list of national competition regulators. The merger arbitrage spread will generally tend to be wider in these circumstances commensurate with the risk of the deal not consummating.
Horizontal mergers often take place in mature industries (but not exclusively) where large companies are experiencing sluggish growth and new markets are hard to find. A corporate combination such as a merger or acquisition may able to reduce costs via overlap. Because of the size and scale of some of these mergers, it is sometimes difficult to discern whether the combination is a merger or acquisition. To address this issue we have produced a separate article entitled The Differences Between Mergers and Acquisitions – Examples & Explanations to assist our readers. We explore this topic in greater detail in a specialist article entitled Horizontal Mergers With Examples – A Complete Guide.
