Horizontal Mergers Summary:
A horizontal merger or acquisition involves merging or acquiring two firms within the same industry and at the same level in the supply chain. It helps businesses achieve various objectives such as market dominance and cost reduction. Horizontal mergers attract more antitrust considerations because they lead to direct reductions in the number of competitors in a market compared to other forms of business combinations.
What Is a Horizontal Merger?
A horizontal merger is an acquisition or merger between two competitors or two entities operating in the same industry. Such companies usually compete or serve the same markets. Unlike vertical or conglomerate acquisitions, a horizontal merger involves two companies dealing with the same products or services. Horizontal mergers involve combining companies in different stages in the same supply chain.
Examples of horizontal mergers and acquisitions include the merger of Exxon Corporation and Mobil Corporation forming ExxonMobil, the acquisition of 21st Century Fox by Disney, the acquisition of Wyeth by Pfizer, and the recent acquisition of Activision Blizzard by Microsoft. All these companies were within the same industries even before they decided to acquire or merge with other firms.
To successfully engage in horizontal mergers and acquisitions, you should consult an M&A lawyer experienced in such transactions right away. This move enables you to comply with relevant regulations and minimize antitrust risks.
Why Companies Pursue Horizontal Mergers and Acquisitions
There are several reasons why a company would choose to pursue a horizontal acquisition or merger.
One of them is the desire to gain market share or revenue streams that would otherwise be difficult to achieve. For example, acquiring your competitor enables you to get their customers, contracts, brand, and distribution channels. This will enable you to cross-sell your other products to your competitor’s clients. You can also combine sales teams to increase revenue and capture market share easily.
Secondly, companies acquire or merge with competitors with a view to reducing costs. The main aim of a horizontal merger or acquisition is to create a single business that can compete effectively against other players. The newly formed company enjoys economies of scale and improved profit margins. For instance, the newly formed firm can cut costs by consolidating activities such as procurement, marketing, accounting, and IT.
Thirdly, businesses pursue horizontal acquisitions or mergers to obtain proprietary technologies, patents, and other capabilities that are difficult to develop internally. Other reasons include geographical expansion, accessing new markets quickly, and building capacity. For instance, a business can expand to new territories by acquiring a competing firm already operating in such markets. Horizontal mergers or acquisitions help companies to diversify and expand their customer bases.
How the Process Works
A typical horizontal merger or acquisition process starts with identifying a target. At this stage, the buyer firm carries out due diligence on a target to see whether it meets the specified target criteria. In most cases, a buyer carries out an antitrust assessment to establish whether a potential deal might trigger antitrust concerns. If there are no concerns, the buyer proceeds with negotiations.
At the next stage, the buyer evaluates the target by applying valuation techniques such as comparable company analysis, precedent transaction analysis, and discounted cash flow model. Once a target has been selected, the buyer and the target sign a letter of intent. The deal documents include purchase price, deal structure, and exclusivity.
The next step entails carrying out a comprehensive due diligence. This involves assessing the target’s past performance and future projections, legal issues, tax implications, and organizational structure. In most cases, the process focuses on the legality of the deal. Legal experts evaluate the target’s material contracts, litigation history, intellectual property, and regulatory compliance.
Next, the buyer and the target negotiate terms of the deal. A horizontal transaction can be structured using a stock purchase agreement, an asset purchase agreement, or a merger agreement depending on the desired outcome. In case of a merger, both entities combine to form a single business entity. On the other hand, a stock purchase transaction sees one company purchasing shares of another company.
In an asset acquisition deal, the buyer acquires assets of the target. There are various elements in the negotiation of a deal. For example, the buyer and the target agree on the representations and warranties, indemnifications, material adverse change clauses, and closing conditions.
Regulatory Review
Because a horizontal merger results in reduced competition in the market, it attracts significant antitrust considerations compared to other mergers. The two main bodies responsible for reviewing horizontal acquisitions in the United States include the Federal Trade Commission and the Department of Justice Antitrust Division. Under Hart-Scott-Rodino Act, mergers that exceed certain threshold values must be reported.
These agencies review the concentration of a deal based on the Herfindahl-Hirschman Index. The Index is calculated based on market shares of all companies in a particular industry. If the merger pushes the index above the required levels, regulators consider the matter further. They evaluate whether the newly formed company would be able to set unilateral prices or engage in coordinated pricing.
Sometimes, regulators ask the parties to divest specific units as a condition for approval. This means that the deal is approved under divestiture but not as initially proposed. Other times, authorities may block the transaction through litigation at the federal court. Some of the notable cases where horizontal mergers were stopped included the proposed acquisition of T-Mobile by AT&T, the attempted Staples/Office Depot merger, and Adobe/Figma deal.
Besides the US authorities, international horizontal mergers must undergo review by the European Commission, the United Kingdom Competition and Markets Authority, and China’s State Administration for Market Regulation based on geographic footprint.
Post-Merger Integration
After closing the deal, the newly created firm needs to integrate with the acquired company to realize the anticipated benefits. Integrating two firms is not an easy task. There are various steps a newly merged business must undertake to achieve integration.
These include designing organizational structure and any needed workforce changes. The new business needs to integrate systems used for management and coordination, including ERP systems and customer relationship management software. Branding is another important component of post-merger integration since it impacts the customers’ perception of a business. Others include management of customer relations and compliance.
Consistent with research, failure to plan integration can doom a business merger. Businesses that focus on integrating post-closing realize more value compared to others.
Key Takeaways
Horizontal mergers and acquisitions are good ways for businesses to reduce competition, grow market shares, and cut costs. However, they are also among the most complicated transactions in law and regulation. A clear understanding of this type of merger or acquisition is critical to undertaking successful business deals.
