For businesses looking for growth through a merger or acquisition, there are two key strategies to consider to determine the ideal business partner or target. Horizontal and vertical mergers have their own unique implications and objectives for business owners considering their growth options:
Horizontal Mergers:
- A strategy for growth by acquiring a competitor. This type of merger occurs when two companies operate in the same industry and at the same stage of a production process and combine their operations. The main aims of a horizontal merger are usually to achieve economies of scale, expand market share or reduce competition within the industry.
- By merging with competitors, companies can streamline operations, reduce costs and leverage combined resources and skills to drive innovation, broaden product offerings and access new markets. A primary objective is to strengthen the combined business’s position by eliminating rivals and increasing market power.
- Ultimately the objective behind a horizontal merger is to create value, where the combined new business is worth more than the two businesses operating individually.
Vertical Mergers:
- In contrast, vertical mergers involve the combination of companies that operate at different stages of the production or distribution process for a product or service. These mergers typically occur between suppliers and customers or between companies involved in upstream and downstream activities within the same industry. In a ‘backward integration’ the business acquires a company that makes a product used within their own production process. Whilst in a ‘forward integration’ the business buys a company that is involved in the post-production part of the process, for example, a distributor/retailer.
- Generally, vertical mergers are driven by a desire to achieve greater control over the supply chain, streamline operations, and capture efficiencies by integrating complementary businesses. One of the key advantages of a vertical merger is the potential for improved supply chain efficiency as companies seek to minimise disruptions, reduce lead times and improve operational reliability. With greater control over supply and distribution chains, a business can improve its ability to provide a consistent customer experience.
Horizontal and vertical mergers represent distinct strategies that can be employed by companies to achieve their strategic objectives. While horizontal mergers focus on consolidating market share and reducing competition, vertical mergers aim to integrate supply chains and capture efficiencies across the production process.
Clearly, the success of any merger hinges on the ability of business owners to effectively integrate operations and realise synergies. By understanding the dynamics and implications of these types of mergers for their own business, in their particular industry, business leaders can make informed decisions on their M&A strategy.
For those considering the next steps of their growth strategy, talk to our advisers about opportunities available across a wide range of sectors throughout the UK.
