HORIZONTAL INTEGRATION IN STRATEGIC

MANAGEMENT

CORPORATE LAW -II

SUBMITTED TO SUBMITTED BY -

MRS. NANDITA JHA AMOL RAJ

(FACULTY OF LAW) ROLL NO. : 911

B.A.LL.B. , 8TH SEM

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 LIST OF CONTENTS

1. INTRODUCTION 3

2. HORIZONTAL INTEGRATION VS. 5

VERTICAL INTEGRATION
3. TYPES OF HORIZONTAL 8
INTEGRATION
4. CASES OF HORIZONTAL 11
INTEGRATION
5. CONCLUSION 13

BIBLIOGRAPHY 14

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 INTRODUCTION

A strategy is an action plan built to achieve a specific goal or set of goals within a definite time,
while operating in an organizational framework. Strategic management is the process of building
capabilities that allow a firm to create value for customers, shareholders, and society while
operating in competitive markets.1 The process of strategic management entails:

Specifically pointing out the firm's mission, vision, and objectives

Developing the policies and plans to achieve the set objectives

Allocating the resources for implementing these policies and plans

Horizontal integration is the acquisition of additional business activities that are at the same level
of the value chain in similar or different industries. This can be achieved by internal expansion
through a reinvestment of operating profits or by external expansion through a merger or
acquisition (M&A). Since the different firms integrating are involved in the same stage of
production, horizontal integration allows them to share resources at that level.2

Horizontal integration, also known as lateral integration, describes the merging of two or more
companies at the same point in the production process in the same or different industries. If the
products offered by the companies are the same or similar, it is a merger of competitors. If all of
the producers of a particular good or service in a given market were to merge, it would result in
the creation of a monopoly. If enough companies conducted a horizontal integration so that only
a few competitors remained, it would be considered an oligopoly.

A characteristic feature of horizontal integration strategy in the external sphere is usually the
integration of business entities, while the internal sphere consolidates strategic business entities
and mutualisation of activity. Relations in the external sphere consist of capital integration in the
form of mergers and takeovers or in contractual integration e.g. in the form of strategic alliances.

1
Nag, R.; Hambrick, D. C.; Chen, M.-J (2007). "What is strategic management, really? Inductive derivation of a
consensus definition of the field" (PDF). Strategic Management Journal. 28 (9): 935955. doi:10.1002/smj.615.
Retrieved 2nd May, 2016.
2
"horizontal integration". businessdictionary.com. Retrieved on 2nd May,2016
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The integration targets are to be situated in the areas of resources, market, efficiency, and
competence. Such areas also cover the internal goals pursued by consolidation and the
integration of activities within the scope of the functions and processes of the company.For
example, Disney merging with Pixar (movie production), Exxon with Mobile (oil production,
refining and distribution) or the infamous Daimler Benz and Chrysler merger (car developing,
manufacturing and retailing). Horizontal Integration can occur in a form of mergers, acquisitions
or hostile takeovers. Merger is the joining of two similar sizes, independent companies to make
one joint entity. Acquisition is the purchase of another company. Hostile takeover is the
acquisition of the company, which does not want to be acquired.

SCOPE OF STUDY

To have an understanding in relation to horizontal integration, its kind and difference from
vertical integration.

HYPOTHESIS

As a company grows bigger with horizontal integration, it might become too rigid, and its
procedures and practices may become unfriendly to change.

RESEARCH METHODOLOGY

The research work will be based upon Doctrinal mode of research.

The Research is entirely a Library-based Research, where the researcher has made use of books,
journals, magazines, internet websites, etc., for the purpose of research.

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HORIZONTAL INTEGRATION VS. VERTICAL INTEGRATION

Growth and expansion are the two needs of every firm, irrespective of its size and nature. Firms
can grow and expand themselves by way of integration. There are two major forms of
integration, i.e. Horizontal Integration and Vertical Integration. Horizontal Integration is a kind
of business expansion strategy, wherein the company acquires same business line or at the same
level of value chain so as to eliminate competition to a greater extent.3

Conversely, Vertical Integration is used to rule over the entire industry by covering the supply
chain. It implies the integration of various entities engaged in different stages of the distribution
chain.

The merger of two or more firms, which are engaged in the same line of business and their
activity level is also same; then this is known as Horizontal Integration. The product may include
complementary product, by-product or any other related product, competitive product or entering
into the products repairs, services, and maintenance section.4

Horizontal Integration reduces competition between firms in the market, as if the producers of
the product get combined they can create a monopoly. However, it can also create an oligopoly if
there are still some independent manufacturers in the market.

It is a tactic used by most of the companies to expand its size and achieve economies of scale due
to increased production level. This will help the company to approach new customers and
market. Moreover, the company can also diversify its products and services.

One of the examples of horizontal integration is the acquisition of Instagram by Facebook and
Burger King by McDonalds. Integration of Exxon and Mobil, oil companies to increase market
dominance is an example of Horizontal Integration.

Vertical Integration is between two firms that are carrying on business for the same product but
at different levels of the production process. The firm opts to continue the business, on the same

3
Chaffee, E. Three models of strategy, Academy of Management Review, vol 10, no. 1, 1985.
4
Mulcaster, W.R. "Three Strategic Frameworks," Business Strategy Series, Vol 10, No 1, pp 6875, 2009.
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product line as it was done before integration. It is an expansion strategy used to gain control
over the entire industry.

The cause of integration is to strengthen the production-distribution chain and to minimize the
cost and wastage of products at various levels. The integration also enables the company to keep
upstream and downstream profits and eliminate intermediaries.5

Apple is the best example of vertical integration; it is the biggest and a renowned manufacturer
of smartphones, laptops and so on. It controls the whole production and distribution process
itself, from the beginning to the end. Another example of this is Alibaba, a Chinese e-commerce
company, that owns the entire system of payment, delivery, search engine and much more. Firms
like Mafatlal, National Textile Corporation, etc have opened up retails stores owned by them, in
order to have an effective control over distribution activities.

Key Differences Between Horizontal and Vertical Integration

The following are the major differences between horizontal and vertical integration:

Horizontal Integration occurs between two firms whose product and production level are same.
Vertical Integration is an integration of two firms that operates in different stages of the
manufacturing process.

Horizontal Integration aims at increasing the size of business and scale of production, whereas
Vertical Integration focuses on strengthening and smoothening its production-distribution
process.

The greatest advantage of horizontal integration is that it eliminates competition between firms,
which ultimately extends the market share of the company. Conversely, Vertical Integration
results in lowering the cost of production and wastage.

Horizontal Integration only brings synergy, but not self-sufficiency while Vertical Integration
helps the company gain synergy with self-sufficiency.

5
Elcock, Howard, "Strategic Management," in Farnham, D. and S. Horton (eds.), Managing the New Public Services,
2nd Edition, New York: Macmillan, 1996, p. 56.
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 Horizontal Integration helps to acquire control over the market, but Vertical Integration is a
strategy used for gaining control over the whole industry.

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 TYPES OF HORIZONTAL INTEGRATION

HORIZONTAL MERGER

A horizontal merger is a merger or business consolidation that occurs between firms that operate
in the same space, as competition tends to be higher and the synergies and potential gains in
market share are much greater for merging firms in such an industry. This type of merger occurs
frequently because of larger companies attempting to create more efficient economies of scale,
such as the amalgamation of Daimler-Benz and Chrysler. Conversely, a vertical merger takes
place when firms from different parts of the supply chain consolidate to make the production
process more efficient or cost effective.6

Horizontal mergers help companies gain advantages over competitors. For example, if one
company sells products similar to the other, the combined sales of a horizontal merger give the
new company a greater share of the market. If one company manufactures products
complementary to the other, the newly merged company may offer a wider range of products to
customers. Merging with a company offering different products to a different sector of the
marketplace helps the new company diversify its offerings and enter new markets.

A horizontal merger of two companies already excelling in the industry may be a better
investment than putting a lot of time and resources into developing the products or services
separately. A horizontal merger can increase a companys revenue by offering an additional
range of products to existing customers. The business may be able to sell to different
geographical territories if one of the pre-merger companies has distribution facilities or
customers in areas not covered by the other company. A horizontal merger also helps reduce the
threat of competition in the marketplace. In addition, the newly created company may have
greater resources and market share than its competitors, letting the business exercise greater
control over pricing.

Following are the important examples of horizontal mergers:

6
"Horizontal Merger Definition". Investopedia.com. Retrieved on 2 nd May, 2017.
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 The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook
Bond

The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of
India) Bank

The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply
Company

The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

HORIZONTAL ACQUISITION

The acquisition of one company by another in the same industry. The new combined entity may
be in a better competitive position than the standalone companies that were combined to form it.
Horizontal acquisitions expand the capacity of the acquirer, but the basic business operations
remain the same.

The companies involved in a horizontal acquisition generally produce the same goods or
services. In a vertical acquisition, on the other hand, the two companies would be in the same
industry but at different stages of the production cycle. For example, an acquisition of one
energy producer by its larger rival would be a horizontal acquisition, but the acquisition of an oil
refining company by an energy producer would be a vertical acquisition.7

Horizontal Hostile takeover is the acquisition of the company, which does not want to be
acquired.

One of the clearest examples of horizontal integration is Facebook's acquisition of Instagram in

2012 for a reported $1 billion. Both Facebook and Instagram operated in the same industry and
were in similar production stages in regard to their photo-sharing services. Facebook, looking to
strengthen its position in the social media and social sharing space, saw the acquisition of
Instagram as an opportunity to grow its market share, increase its product line, reduce
competition and access potential new markets. All of these things came to pass, resulting in a
high level of synergy.

7
"Horizontal Acquisition Definition". Investopedia.com. Retrieved on 2nd May, 2017
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Another great example of a horizontal integration is Disney's acquisition of Pixar Studios.
Disney, facing market saturation with its current operations, was looking for ways to expand and
increase profits. Disney had started out as an animation studio that targeted families and children.
Pixar Studios also operated in the same space as Disney, but it had more cutting-edge technology
when it came to digitally animated movies. To grow its market share, strengthen its product line,
reduce its competition and access new markets, Disney acquired Pixar Studios.

Exxon's acquisition of Mobil is a good example of a horizontal integration. Both operated in the
same industry and were in similar production stages, and Exxon was able to gain access to
Mobil's gas stations as well as its product reserves.

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 CASES OF HORIZONTAL INTEGRATION

Glaxo Wellcome and SmithKline Beecham announced their intention to merge in January 2000.
The merger was completed in December that year, forming GlaxoSmithKline (GSK).
GlaxoSmithKline plc (GSK) is a British pharmaceutical company headquartered in Brentford,
London. Established in 2000 by a merger of Glaxo Wellcome and SmithKline Beecham, GSK
was the world's sixth largest pharmaceutical company as of 2015, after Pfizer, Novartis, Merck,
Hoffmann-La Roche and Sanofi.8

In December 2009, Volkswagen AG bought a 49.9% stake in Dr. Ing. h.c. F. Porsche AG (more
commonly known as Porsche AG) in a first step towards an 'integrated automotive group' with
Porsche. The merger of Volkswagen AG and Porsche SE was scheduled to take place during the
course of 2011. On 8 September 2011, it was announced that the planned merger "cannot be
implemented within the time frame provided for in the Comprehensive Agreement." As reasons,
unquantifiable legal risks, including a criminal probe into the holding's former management team
were given. Both parties "remain committed to the goal of creating an integrated automotive
group with Porsche and are convinced that this will take place." On 4 July 2012 Volkswagen
group announced they would wrap up the remaining half of Porsche shares for 4.46 billion euros
($5.58 billion) on 1 August 2012 to avoid taxes of as much as 1.5 billion euros, which would
have to be paid if the wrap up happened after 31 July 2014. Volkswagen AG purchased the
remaining stake in Porsche AG equaling 100% of the shares in Porsche Zwischenholding GmbH,
effectively becoming its parent company as of 1 August 2012.9

In 2002, Compaq signed a merger agreement with Hewlett-Packard for $24.2 billion, including
$14.45 billion for goodwill, where each Compaq share would be exchanged for 0.6325 of a
Hewlett-Packard share. There would be a termination fee of $675 million USD that either
company would have to pay the other to break the merger. Compaq shareholders would own
36% of the combined company while HP's would have 64%. Hewlett-Packard had reported
yearly revenues of $47 billion, while Compaq's was $40 billion, and the combined company
would have been close to IBM's $90 billion revenues. It was projected to have $2.5 billion in

8
"GSK History". GlaxoSmithKline.com. Retrieved from the original on 3rd May 2017.
9
"Volkswagen takes 49.9 percent stake in Porsche AG". VolkswagenAG.com . Retrieved on 3rd May 2017.
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annual cost savings by mid-2004. The expected layoffs at Compaq and HP, 8500 and 9000 jobs,
respectively, would leave the combined company with a workforce of 145,000.10

ArcelorMittal was created by the takeover of Western European steel maker Arcelor (Spain,
France, and Luxembourg) by Indian-owned multinational steel maker Mittal Steel in 2006, at a
cost of 40.37 per share, approximately $33 billion total. Mittal Steel launched a hostile takeover
bid which replaced a previous planned merger between Arcelor and Severstal, which had lacked
sufficient shareholder approval. The resulting merged business was named ArcelorMittal and is
headquartered in Luxembourg. The resulting firm produced approximately 10% of the world's
steel, and was by far the world's largest steel company. Total revenues in 2007 were $105 billion.
In October 2008, the market capitalisation of ArcelorMittal was over $30 billion.11

On 7 September 2009, Kraft Foods made a 10.2 billion (US$16.2 billion) indicative takeover
bid for Cadbury. The offer was rejected, with Cadbury stating that it undervalued the company.
Kraft launched a formal, hostile bid for Cadbury valuing the firm at 9.8 billion on 9 November
2009. On 2 February 2010, Kraft secured over 71% of Cadbury's shares thus finalising the deal.
Kraft had needed to reach 75% of the shares in order to be able to delist Cadbury from the stock
market and fully integrate it as part of Kraft. This was achieved on 5 February 2010, and the
company announced that Cadbury shares would be de-listed on 8 March 2010.12

10
"The Hewlett-Packard and Compaq Merger" (PDF). Retrieved on 3rd May, 2017
11
Kanter, James; Timmons, Heather; Giridharadas, Anand (25 June 2006), Arcelor agrees to Mittal takeover, New
York Times, Retrieved on 3rd May, 2017
12
"Cadbury agrees Kraft takeover bid". BBC News. London: BBC. 19 January 2010. Retrieved on 3rd May 2017.
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 CONCLUSION

As touched upon earlier, the management of a company should be able to handle the bigger
organisation efficiently if the advantages of horizontal integration are to be realised.

The legal ramifications will have to be studied as there are strict anti-monopoly laws in many
countries: if the merged entity threatens to oust competitors from the market, these laws will be
used against it. Since the companies work together, they yield more services or products.
However it cost less to purchase an existing product than to start another one from score.
Horizontal integration becomes more profit when the company grows in size. Cost of developing
is less when compared to total income. This helps the company to save money and increase
profits. They also have more strength over supplier and distributor. It reduces the competitor.

Standard Oil, which was seen as a powerful conglomerate brooking no competition, was split up
into over 30 competing companies in an anti-trust case. As a company grows bigger with
horizontal integration, it might become too rigid, and its procedures and practices may become
unfriendly to change. This could prove dangerous to it.

Moreover, synergies between companies that may have been predicted may prove elusive or
non-existent (for example, the failed horizontal integration of hardware and software companies
merged in the expectation of synergies between their products).

The decision whether to employ vertical or horizontal integration has a long-term influence on
the business strategy of a company.

Each company will have to choose the option more suitable to it, based on its unique place in the
market and its customer value propositions. A deep analysis of its strengths and resources will
help it make the right choice.

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 BIBLIOGRAPHY

1. Nag, R.; Hambrick, D. C.; Chen, M.-J (2007). "What is strategic management, really?

Inductive derivation of a consensus definition of the field" (PDF). Strategic Management

Journal.

2. Chaffee, E. Three models of strategy, Academy of Management Review, Vol. 10

3. Mulcaster, W.R. "Three Strategic Frameworks," Business Strategy Series, Vol 10

4. Elcock, Howard, "Strategic Management," in Farnham, D. and S. Horton (eds.),

Managing the New Public Services, 2nd Edition, New York: Macmillan, 1996

5. Kanter, James; Timmons, Heather; Giridharadas, Anand (25 June 2006), Arcelor agrees

to Mittal takeover, New York Times,

6. www.bbcnews.com BBC News, London

7. www.businessdictionary.com

8. www.investopedia.com

9. www.GlaxoSmithKline.com

10. www.VolkswagenAG.com

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