Horizontal Integration: Efficient Combination

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Horizontal Integration not only can save an overly cost-burdened business, but it can be a means to rapid growth for each and all of the participants in the transaction.

Horizontal integration is simply a process where competitors (though they might not be selling the exact same product or selling into the same exact marketplace) or sellers of complementary or non-conflictory products (or services) at the same stage in their corporate development join forces through a merger or acquisition (a combination transaction) in order to collaborate and produce synergy for their mutual benefit. Horizontal integration is not only an efficiency engine, but it is also a means by which smaller companies can grow rapidly, in a sort of modular fashion, and increase their portfolio of products (or services) and greatly increase and diversify their aggregate customer base.

The analogy that I’ve heard regarding horizontal integration combination transactions (sometimes actually in either a series or a free-for-all “come together”) is that smaller, more competitive but under-evolved companies “circle their wagons to ward off the effects of recession, too high a fixed-cost hurdle, or a one-product non-diversified model.”

An explanatory picture follows, which sums up the benefits of combination versus competition quite nicely. The ironic fact is that through the process of horizontal integration, two or more marginally profitable (and barely self-sustaining) companies can combine and become a winner, not unlike connecting all of the pieces of a once-scattered jigsaw puzzle.

The one clarification required here is that the firms involved in a combination don’t have to be in the exact same business, or even in competitive positions — the key is that these combination usually involve firms at the same same stage of development and with the same areas of vulnerability….and many of the same needs.

HORIZONTAL INTEGRATION - Competitors Combine To Create Multiple Synergies - Douglas E. Castle

 

 

 

 

 

 

 

 

 

 

 

 

In sum, the two principal reasons for competitors to combine and become one larger “combination” entity (aside from the economies of scale in dealing with suppliers and in pricing goods or services out to customers to snatch up even more of the marketplace and possibly achieve a greater dollar size per combination customer order) are:

1) To increase and diversify revenues – uniting instead of fighting; and,
2) Reducing fixed costs by eliminating redundant expenditures on personnel and processes.

The tighter that credit becomes, and the more price-sensitive customers become (as in a recession), the more conducive the marketplace economy is to this combinationĀ  strategy. Competition gives way (in atomistic struggling firms) to combination, and combination ultimately can lead, if unchecked, to monopolies. But that is a subject for another day.

Horizontal integration is one of the simplest and most effective non-organic growth strategies for every company brought into the transaction.

Douglas E. Castle

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