Are you looking to grow your business through a merger or acquisition?
If the answer is yes, then you will need to understand the differences between horizontal and vertical integration. Both are strategies that can lead to increased production, lower costs and the ability to enter new markets. However, there are corresponding downsides and it is important to be fully aware of these to ensure you make an informed decision.
In this article, we look at the differences between horizontal and vertical integration. If you want to know more about mergers and acquisitions and the legal considerations, please do not hesitate to contact our team.
What is horizontal integration?
Horizontal integration is a competitive strategy. It refers to the merger and acquisition of businesses that are on the same level of the supply or value chain, for example, two law firms, tour operators, or makers of car parts.
Horizontal integration provides a vehicle for businesses to grow by acquiring competitors. Successful examples of horizontal integration are the Walt Disney Company & 21st Century Fox and Facebook & Instagram.
What are the advantages of horizontal integration?
The benefits of horizontal integration include:
- A chance to increase economies of scale, providing more scope to negotiate supplier deals and consumer contracts
- Enables greater production at reduced costs
- It immediately eliminates a competitor
- New markets can be explored, including those in different countries
- Being able to consolidate costs by sharing technology, R&D, marketing, and energy costs
What are the disadvantages of horizontal integration?
- There can be difficulties with employees and the structure of the new organisation. Because the two businesses provide similar or identical services, there are likely to be duplications when it comes to skills [CM1] and addressing this is difficult if TUPE applies
- In cross-border M&As complying with each state’s laws and regulations can be challenging
What is vertical integration?
This is essentially the opposite of horizontal integration. It is where a company takes over one or more enterprises that are on different levels of the supply or value chain. Using vertical integration, a business can acquire a producer, vendor, supplier, distributor, or other related company within the same industry.
Companies can integrate vertically by moving either backwards or forwards.
Backwards integration – a company acquires a business that makes a product that is incorporated into the buyer’s product, for example, a restaurant purchases a vegetable supplier.
Forwards integration – the purchasing company buys a post-production organisation, for example, a car manufacturer acquiring a vehicle dealership.
Vertical integration is often used by organisations that want to have all elements of supply under their own control, for example, manufacturing, distribution, and support/maintenance.
Another reason for vertical integration is to provide consumers with a one-stop shop when it comes to a particular product or service.
Examples of vertical integration include TUI and Apple.
What are the advantages of vertical integration?
The benefits of vertical integration include:
- You have complete control over the supply and distribution chains. This will allow you to provide a smooth and consistent customer experience
- As you integrate more companies you can use their offerings to increase your brand
- Risks and shortfalls can be diversified throughout the business. For example, if one part of the business is doing well, its profits can be re-invested into areas that are struggling
- Selling products directly to customers will increase profit levels
What are the disadvantages of vertical integration?
Less competition can lead to a drop in production standards and customer service
The pressure to keep up a certain level of production and meet internationally set targets can lead to inflexibility
Get legal assistance from LawBite
Horizontal and vertical integration are competitive strategies that can transform your business, allowing it to reach consumers and markets that previously were beyond reach.
Our M&A solicitors will take care of the legal aspects of the integration so you can focus on your employees and growth objectives.
LawBite has helped thousands of businesses achieve their commercial ambitions. To find out how we can help you on all matters concerning mergers and acquisitions, book a free 15 minute consultation or call us on 020 3808 8314.