What’s the Difference Between a Horizontal and Vertical Merger?

Estimated read time 3 min read

It’s not uncommon for two companies to combine into a single new company. Known as a merger, it allows the combined companies to leverage each other’s resources. After merging, they’ll operate as a single company while simultaneously sharing their employees, contracts, trade secrets, assets and other resources. There are two different types of mergers, however, including horizontal and vertical. While they both involve the combination of two companies, horizontal and vertical mergers differ in several ways.

Horizontal vs Vertical Merger: What’s the Difference?

What Is a Horizontal Merger?

A horizontal merger is characterized by the combination of two companies that operate in the same market. It’s typically performed to reduce competition. With a horizontal merger, two similar companies are combined so that they no longer have to fight each other for the same customers.

All companies face at least some competition. While competition is often the driving force behind innovation, too much competition can make it difficult for companies to succeed. The companies will have a smaller pool of customers to whom they can sell their products or services. A horizontal merger is a way for two companies to reduce competition by combining into a single, new company.

What is a Vertical Merger?

A vertical merger, on the other hand, is characterized by the combination of two companies that operate in the same market but are at different stages of production. With a vertical merger, both companies operate in the same market — just like with a horizontal merger. The companies, however, are at different stages of production, so they aren’t considered direct competitors of each other.

Unlike horizontal mergers, vertical mergers aren’t performed to reduce competition. Instead, they are performed to increase efficiency. Companies, for example, can streamline their supply chain with a vertical merger. When companies operate at different stages of production, they each have their own specialty. A vertical merger will combine the companies so that they leverage each other’s specialty, resulting in a streamlined supply chain.

In Conclusion

Mergers are often defined as either horizontal or vertical. A horizontal merger occurs when two competing companies join together to form a single company, whereas a vertical merger occurs when two companies in different stages of production join together to form a single company. Horizontal mergers are performed to reduce competition. Vertical mergers are performed to increase efficiency.

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