How it works
Companies can choose from several
strategies when they merge or are
part of an acquisition. Two of the
most common are horizontal and
vertical integration.
Horizontal deals are always done
between competitors that produce
similar types of products, such as
cars or mobile phones, and often
share—or compete for—the same
suppliers and clients. As a result of
merger or acquisition, the newly
formed company can make cost
savings in production, distribution,
sales, and marketing. Vertical deals
are usually between businesses
involved in the same industry but
at different stages—for example,
a computer maker and a component
manufacturer. These deals can
be upstream (toward the market)
or downstream (in the direction
of operations and production).
Vertical vs. horizontal
integration
Lateral integration Another
term for horizontal integration
Horizontal monopoly When
a company controls the market
after buying up the competition
Synergy The potential of merged
companies to be more successful
as a single entity
NEED TO KNOW
Companies that want to expand through a merger or acquisition
may decide on a strategy of either horizontal or vertical integration,
combining businesses involved in similar or dissimilar activities.
Publisher A, a general publisher,
acquires specialized academic
Publisher B to strengthen its
textbook division.
PUBLISHER B
PUBLISHER AB
PUBLISHER A
Integration models in practice
In these hypothetical examples, a cluster of printers, publishers, and bookstores
merge or acquire each other in horizontal or vertical deals that aim to strengthen
their market position, take advantage of economies of scale, and exploit synergy.
Horizontal integration
Two publishing companies, both involved
in the process of book creation but with
different areas of specialization, agree to a
merger deal to gain a larger market share.
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how companies work
Buying and selling business
MERGER AND
ACQUISITION TYPES
31%
of businesses
worldwide
planned to
expand through
a merger or
acquisition in
the three years
from 2014
Conglomerate
Combining two companies with
nothing in common: for example,
in 1985, tobacco-producer Philip
Morris purchased General Foods, a
new line of business unconnected
to legal wrangles around smoking.
Market extension
Combining two companies that sell
the same products but in different
markets: for example, in 1996, the
Union Pacific Railroad Company
acquired the Southern Pacific Rail
Corporation to link railroads in
adjacent US regions.
Product extension
Combining two companies that sell
different but related products in
the same market: for example,
in 2014, Microsoft bought Nokia’s
mobile-phone unit to address
flagging PC sales and its weakness
in the mobile device market.
ONLINE
BOOKSTORE
A
Publisher A buys Printer A
to improve print capacity
and production costs and
provide warehouse space.
PRINTER A
Publisher A buys
Online bookstore A
to improve brand presence
and provide direct sales.
PUBLISHER A
Vertical
integration
A publisher acquires
two related businesses—
a printer and an online
bookstore—so that it can
have greater control over
production of its books
and their route to market.
PUBLISHER/ONLINE
BOOKSTORE A
PUBLISHER/
PRINTER A
Forward
(upstream)
Backward
(downstream)
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