image Horizontal vs Vertical Merger: Which Is Better?

Horizontal vs Vertical Merger: Which Is Better?

While a merger provides a wonderful opportunity for a company to grow, that growth depends on your ability to make the most of the moment. If you understand all of the important details, you’ll be able to help manage anxious employees and ensure your entire office is ready for the upcoming transition. 

Knowledge is power, and you need to know as much as possible to minimize potential disruptions to your operation and maximize potential opportunities. Ready to learn more about the different types, including which is best? Keep reading to learn everything you need to know. 

What Is a Horizontal Merger? 

A horizontal merger refers to two companies in the same industry coming together. This is the most common way and brings plenty of benefits to both companies, which is why so many choose this method. However, there are also some drawbacks. By familiarizing yourself with the different strengths and weaknesses of a horizontal merger, you can guide your company in the best direction. 

Benefits of Horizontal  

The biggest benefit of horizontally merging with another company is that it helps to reduce the competition and increase your market share. Think of it as the ultimate teaming up: by joining with one of your biggest rivals – or even a company you greatly look up to -you can create a company strong enough to take out the rest of the competition. 

When done well, this helps you reduce costs by more effectively utilizing economies of scale. It simultaneously helps you to realize economies of scope while pooling diverse skills and resources, ensuring the final company is stronger now than the two companies were when separated (something you should definitely communicate to your team). 

Drawbacks of Horizontal  

Arguably the biggest potential drawback is that it risks creating a monopoly. This means your company may be under increased legal scrutiny throughout the entire process and, at worse, might face negative repercussions from the federal government. 

Beyond that, most of the drawbacks concern employees from both companies not working well together. For example, different corporate cultures and management styles may cause workers from different businesses to clash once they are forced to work together, and this may keep you from achieving an overall synergy. 

Two businessmen shaking hands on a merger looking up at camera

What Is a Vertical Merger? 

This is when two companies focusing on different areas of production form together into a single business. For example, one company might manufacture certain products and another company might sell them. By merging together into a single company, these two companies will be more efficient than ever before. 

As with horizontal merging, there are plenty of benefits, but there are also a few drawbacks. It’s important for any effective corporate leader to understand both the pros and cons before proceeding. 

Benefits of Vertical  

We already touched on one of the chief benefits: It will make doing business much more efficient. You’re bringing different stages of production under one roof, and that potentially allows every stage of production to be smoother than it was before the merger.. 

Another (and some would say more important) benefit is a reduction in overall production costs while achieving a boost in revenue. You may also be pleasantly surprised at how much a move like this boosts the value of both companies, all while opening the door to some game-changing synergies. 

Drawbacks of Vertical  

Some of the biggest drawbacks are the same. For example, there is still potential for different personalities, management styles, and corporate cultures to clash together, and you may still run against federal law if the government thinks the move was a way for you to reduce fair competition in the marketplace. 

It can sometimes lead to lower productivity, a loss of focus, and even a loss of your best employees, all because workers don’t like the new business relationship. As we noted before, though, this is mostly caused by poor or ineffective leadership during this crucial time. If you and other leaders step up and provide personalized support through the process, you can enjoy all of the synergistic benefits and few (or maybe even none) of the drawbacks. 

Which Is Better: Horizontal or Vertical? 

The truth is there is no one-size-fits-all answer. It all depends on the needs of your company. 

Generally, horizontal mergers are better for outright company growth and vertical mergers are better for streamlining the production process. Throughout its lifetime, any successful business will most likely need to engage in both types to remain viable and competitive. By understanding the benefits and drawbacks of each, you can become the kind of adaptive leader that your company and your employees deserve. 

Make Your Next Merger Easier Than Ever! 

Now you know what type of merger will benefit your business best. But do you know where you can make the most of your skills in management? 

At Confie, we have a record of positive M&A negotiations because we always put people first. Learn more about successful M&A skills in our knowledge center. For more information about Confie, contact us today or call us at (714) 252-2500