Horizontal Integration Definition Top 5 Real Life Examples

Horizontal Integration Definition

Examples of Horizontal Integration

We are going to look at some of the recent real-life examples of horizontal integrations to get an idea about what motivations lead to this process and how companies have benefited from it: –

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Example #1 – Vodafone-Idea

Vodafone and Idea were two telecommunication giants in India. Both companies had a nominal market share with some pricing power over the customers. However, with Reliance Jio, all the telecom companies took a significant hit. Jio launched attractive offers for the customers to avoid and gradually shifted from other companies to Jio. Let us look at a few numbers: –

The merged entity could service a larger customer base with relatively lower assets and combined resources. In addition, the cost savings from equipment, employees, operations, and other heads led to an estimated annual synergy of $2 billion for the merged entity.

Example # 2 – Marriott-Starwood

Marriott and Starwood were two renowned hotel chains all across the globe. In 2016, Marriot acquired Starwood in a deal wherein the Starwood shareholders were given 0.8 shares of the merged entity against every Starwood share they held (0.8x acquisition ratio).

Post-merger, Marriott has access to over 6,000 properties in about 125 countries. The biggest challenge this deal faced was merging the loyalty programs of the two chains because of the different benefits each program provides. The mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more was officially complete, consolidating the various loyalty programs into one during the second half of 2018.

Example #3 – Arcelor-Mittal

Arcelor-Mittal is the world’s largest steel producer, formed after two steel giants, Arcelor SA and Mittal Steel Company, merged. LN Mittal became the President of the new entity and owned the majority stake.

Mittal started the bid for a merger by offering cash to Arcelor shareholders. The board initially did not agree to the merger and started looking at Severstal for a possible merger. However, after detailed talks, Mittal improved its bid and, looking at the perceived synergies that the new entity would offer, paid €40.37 to Arcelor shareholders to buy them out. The resulting firm produced 10% of the world’s total steel post-merger.

Example #4 – Exxon-Mobil

Exxon and Mobil were two separate giants in the oil industry. They were both a part of Seven Sisters, a name given to 7 oil and petroleum companies that dominated the industry from the 1940s to the 1970s. In 1998, both these companies announced that they were merging to form a new entity, which would be called Exxon-Mobil. It was an all-stock transaction and is, to date, the biggest transaction recorded in the oil industry.

The Mobil shareholders received 1.32 shares of the merged entity for each of their shares in Mobil since the formal transaction involved Exxon buying Mobil to form the new entity. That resulted in 30% of ExxonMobil being held by previous Mobil shareholders and 70% being previous Exxon shareholders.

Within 15 days of the announcement of the merger, Exxon’s stock price recorded a 3.3% gain jumping from $71.63 to $74. Likewise, Mobil’s stock price increased 5.6%, from $83.75 to $88.44.

The merger went through an exhaustive review by the Federal Trade Commission to check for the formation of a monopoly in the petroleum industry. The merger was approved after the company agreed to the terms and conditions set by the Federal Trade Commission upon review.

Example #5 – JP Morgan Chase

The JP Morgan and Chase bank resulted from a merger between Chase Manhattan Bank and JP Morgan Company for an all-stock transaction of approximately $31 billion. Chase Manhattan was the third biggest banking company in the U.S., controlling an asset worth roughly $396 billion compared to the $266 billion JP Morgan company. Together, the merged entity would have total assets worth more than $650 billion, putting them in the second position after only Citigroup, which had $800 billion in assets.

The deal was an all-stock transaction, with Chase formally acquiring JP Morgan, exchanging 3.7 shares for each of JP Morgan’s shares.

Conclusion

Horizontal integrations are a common practice in corporate finance. All companies are trying to become market leaders, and sometimes when the interests of 2 companies align, a merger helps them achieve those interests. However, the government keeps a check on mergers. It has the power to impose Antitrust laws, disallowing the merger if it perceives that it would lead to situations that are against the public interest. As a result, horizontal mergersHorizontal MergersHorizontal mergers take place when two companies in the same industry merge. Typically, industry competitors seek such mergers for a variety of reasons, including increasing market share, achieving economies of scale, lowering competition, and so on.read more are most common among companies in a mature cycle stage, increasing market share and efficiency.