How do you choose between horizontal and vertical M&A strategies?

Mergers and acquisitions (M&A) are strategic decisions that can create value, diversify risk, and enhance competitive advantage for businesses. However, not all M&A deals are equally beneficial or feasible. Depending on the industry, market, and objectives, you may have to choose between horizontal and vertical M&A strategies. In this article, you will learn the differences, advantages, and disadvantages of these two types of M&A, and how to evaluate them based on some key criteria.

1 Horizontal M&A

Horizontal M&A occurs when two businesses that operate in the same industry and offer similar products or services merge or acquire each other. The main goal of horizontal M&A is to achieve economies of scale, increase market share, reduce competition, and access new customers or geographies. For example, if two airlines merge, they can consolidate their routes, fleets, and staff, and increase their bargaining power with suppliers and regulators. However, horizontal M&A also involves some challenges, such as regulatory scrutiny, integration costs, cultural clashes, and potential loss of innovation or differentiation.

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Philip Davis

Managing Partner at Capital Trading Ideas (Hedge Fund)
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Horizontal is about buying or merging with companies in the same industry – it's like gathering all the best players for your team. It can mean more market share, but also more regulatory scrutiny. Vertical, on the other hand, is about controlling the supply chain, from production to sales. It's like owning the entire process, from mining the ore to selling the sword. It can streamline operations but requires managing diverse business aspects. The choice? It boils down to your goals. Want market dominance? Go horizontal. Eyeing efficiency and control? Vertical's your game. Just remember, with great power comes great responsibility – and in M&A, a hefty dose of due diligence.

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Carlos Eduardo Letran Bueno
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In my experience, the choice of a horizontal M&A strategy should be driven by a clear understanding of the competitive landscape. I was involved in an M&A deal where we meticulously analyzed market share dynamics and competitor strategies. This detailed analysis helped us identify synergies in market reach and product offerings, leading to a successful merger that significantly enhanced our client's market positioning. One thing I’ve found helpful in horizontal M&A is prioritizing cultural compatibility between merging entities. Despite the apparent operational synergies, overlooking cultural alignment can lead to integration challenges, impacting long-term success.

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2 Vertical M&A

Vertical M&A occurs when two businesses that operate at different stages of the same supply chain merge or acquire each other. The main goal of vertical M&A is to achieve economies of scope, improve efficiency, reduce dependency, and control quality or pricing. For example, if an automobile manufacturer acquires a tire supplier, it can lower its production costs, ensure timely delivery, and avoid price fluctuations or shortages. However, vertical M&A also involves some risks, such as over-specialization, reduced flexibility, increased complexity, and potential conflicts of interest or antitrust issues.

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Carlos Eduardo Letran Bueno
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In my experience, a critical aspect of vertical M&A is assessing the potential to innovate and differentiate in the market. Merging with a supplier or distributor can open new avenues for product or service innovation, which was a decisive factor in one of our successful acquisitions.

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3 Criteria for choosing

When making a decision between horizontal and vertical M&A strategies, there is no one-size-fits-all answer, as each deal depends on the specific context and objectives of the businesses involved. To evaluate and compare the options, consider the synergy that could be created by combining resources, capabilities, and assets of the two businesses. Also consider the compatibility of their culture, vision, values, and goals, as well as the cost in terms of cash, equity, debt, fees, and taxes. Moreover, assess the potential risks or uncertainties that could jeopardize the deal or its outcomes and evaluate alternative or complementary strategies that could create more value or growth for the businesses. Ultimately, compare the deal to the opportunity cost of not pursuing other options.

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Carlos Eduardo Letran Bueno
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It's vital to assess not just the immediate financial and operational benefits but also the long-term strategic alignment with the company's vision. Balancing short-term gains with long-term strategic objectives has been a key factor in our decision-making process.

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4 Examples of horizontal and vertical M&A

To illustrate how these criteria can be applied in practice, let's look at some examples of horizontal and vertical M&A deals in different industries. For instance, Disney acquired 21st Century Fox for $71 billion in 2019 in a horizontal M&A deal, creating the largest media and entertainment conglomerate. The synergy of combining the content, distribution, and technology assets of the two companies, as well as the fit of their brand identities and customer segments drove this deal. It also helped Disney increase its market share and reduce competition in the streaming and film markets. However, this deal also involved a high cost of debt and equity, as well as a high risk of regulatory approval and integration challenges. Similarly, Microsoft acquired LinkedIn for $26 billion in 2016 in a vertical M&A deal, creating the largest professional network and software platform. The economy of scope of offering integrated solutions and services to businesses and individuals, as well as the efficiency of leveraging the data and insights of the two companies drove this deal. It also helped Microsoft improve its position and differentiation in the cloud and social media markets. Nevertheless, this deal was associated with a premium price, as well as a complexity of maintaining the autonomy and identity of LinkedIn.

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5 Best practices for M&A strategy

Regardless of the M&A strategy you choose, there are some best practices that can help you maximize success and value creation. This includes conducting thorough due diligence and valuation of the target and the deal, aligning the vision and expectations of stakeholders and management teams, communicating clearly with employees, customers, and partners, planning and executing a smooth integration process, and monitoring and evaluating performance and results. M&A is a complex process that necessitates careful analysis, planning, and execution. By comprehending the differences between horizontal and vertical M&A strategies, you can make informed strategic decisions for your business.

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Carlos Eduardo Letran Bueno
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One thing I’ve found helpful is establishing a dedicated integration team early in the process. This team focuses on aligning business processes, systems, and culture, which is crucial for the success of any M&A strategy. In my experience, maintaining transparent and frequent communication with all stakeholders throughout the M&A process is paramount. This approach was instrumental in one of our major M&A projects, fostering trust and minimizing resistance to change.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you choose between horizontal and vertical M&A strategies?

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1 Horizontal M&A

2 Vertical M&A

3 Criteria for choosing

4 Examples of horizontal and vertical M&A

5 Best practices for M&A strategy

6 Here’s what else to consider

Corporate Finance

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