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Horizontal Mergers

Horizontal Mergers

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Published by Rahul Aggarwal

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Categories:Types, Business/Law
Published by: Rahul Aggarwal on Sep 03, 2010
Copyright:Attribution Non-commercial

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04/07/2013

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Mergers and acquisitions
are defined as the process of combining two differentcompanies to form a new company or new business entity. Mergers and acquisitions areabbreviated as M&A. M&A is one of the most essential components of corporate strategyand corporate finance and usually done by the
companies
to expand their operations toimprove their profitability in the business.
Horizontal Mergers - Horizontal Integration, Horizontal Monopoly, HorizontalExpansion
Horizontalmergersare those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. The principalobjective behind this type of mergers is to achieve economies of scale in the production procedure through carrying off duplication of installations, services and functions,widening the line of products, decrease in working capital and fixed assets investment,getting rid of competition, minimizing the advertising expenses, enhancing the marketcapability and to get more dominance on the market. the horizontal mergers do not havethe capacity to ensure the market about the product and steady or uninterrupted rawmaterial supply. Horizontal mergers can sometimes result in monopoly and absorption of economicpower in the hands of a small number of commercial entities.According to strategic management and microeconomics, the expression horizontalmerger delineates a form of proprietorship and control. It is a plan, which is utilized by acorporation or commercial enterprise for marketing a form of commodity or service in alarge number of markets. In the context of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of production or manufacturing. A horizontal merger is when two companies competing in the samemarket merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontalmergers are very common. If a small local drug store were to horizontally merge withanother local drugstore, the effect of this merger on the drugstore market would beminimal. In a large horizontal merger, however, the resulting ripple effects can be feltthroughout the market sector and sometimes throughout the whole economy.Large horizontal mergers are often perceived as anticompetitive. If one company holdingtwenty percent of the market share combines with another company also holding twenty percent of the market share, their combined share holding will then increase to forty
 
 percent. This large horizontal merger has now given the new company an unfair marketadvantage over its competitors.All companies are subject to Federal laws that prohibit certain actions from taking placeduring a horizontal merger. When a horizontal merger takes place, the loss of acompetitor in the market creates benefits for the companies that merged, while at thesame time serves to drive prices up for the consumer. Federal laws protect the consumer  by prohibiting companies from creating a monopoly.
Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally,a monopoly is formed by both vertical and horizontal mergers. Horizontal merger is thatcondition where a company is involved in taking over or acquiring another company insimilar form of trade. In this way, a competitor is done away with and a wider market andhigher economies of scale are accomplished.In the process of horizontal merger, the downstream purchasers and upstream suppliersare also controlled and as a result of this, production expenses can be decreased.
Horizontal Expansion
An expression which is intimately connected to horizontal merger is horizontalexpansion. This refers to the expansion or growth of a company in a sector that is presently functioning. The aim behind a horizontal expansion is to grow itsmarket share for a specific commodity or service.
Examples of Horizontal Mergers
Following are the important examples of horizontal mergers:
 
The formation of Brook Bond Lipton India Ltd. through the merger of LiptonIndia and Brook Bond
The merger of Bank of Mathura withICICI(Industrial Credit andInvestment  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.) withDamodar Cement
Advantages of Horizontal Merger:
Horizontal merger provides the following advantages to the companies which aremerged:
1)Economiesof scope
The notion of economies of scope resembles that of economies of scale. Economies of scale principally denote effectiveness related to alterations in the supply side, for example, growing or reducing production scale of an individual form of commodity. Onthe other hand, economies of scope denote effectiveness principally related to alterationsin the demand side, for example growing or reducing the range of marketing and supplyof various forms of products. Economies of scope are one of the principal causes for marketing plans like product lining, product bundling, as well as family branding.
2) Economies of scale
Economies of scale refer to the cost benefits received by a company as the result of ahorizontal merger. The merged company is able to have bigger production volume incomparison to the companies operating separately. Therefore, the merged company can

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