Horizontal Mergers With Examples – A Complete Guide

The primary reason for the horizontal combination is to reduce costs. This puts the focus looking backward towards suppliers in the value chain. The combination of the firms increases the buying power of the combined entity and puts pressure on the supplier to lower the cost of the inputs supplied to the combined firm. Profits can be increased by reducing input costs whilst maintaining sales levels and prices. Many firms favor this type of amalgamation as it keeps the focus away from the consumer thus reducing the chances of regulatory interference. Michael E. Porter refers to this as one of his 5 forces in his book Competitive Strategy as the Bargaining power of customers.

However, this is not the only potential benefit to the merger. The firm may wish to draw the wrath of the appropriate regulatory authorities by charging higher prices to its customers. This is done under the guise of product improvements or increased service levels. With less competition following the merger, companies are often keen to maximize their new industry position.

Additional sources of income of ways of raising profitability can be made by eliminating overlap especially in research & development budgets whilst maintaining output. Mid-tier management is also often at risk as job duplication can also be eliminated to help cut costs. This is especially true if the combining firms are in the same geographic area. 

If there is no overlap in this instance, this expansion into new territories can be maximized by the increase in the product range. Manufacturing capability or product development can also be improved as the combined technologies help create superior products. These can be sold at higher prices or used as a way to consolidate market share.