What Is Horizontal Consolidation?

Horizontal consolidation is a business strategy whereby two separate businesses or organizations actively merge their two organizations. Usually, a horizontal consolidation occurs between two or more organizations or companies in the same industry with the added proviso that the two or more separate organizations must have reached a comparable point in their product or service production. This means that before any two companies can consider horizontal consolidation, the companies must be at a level of development that will make it easy for them to merge in a more seamless manner. To this end, a company that has progressed far more than another company will not be able to achieve a horizontal consolidation. In this case, the merger between the companies will be considered a vertical consolidation due to the disparity between the two or more organizations.

The reason why firms or companies embark on a horizontal consolidation is often related to the desire to increase their profits, corner a market, integrate services across board, and increase the performance of such companies. An example of a situation where horizontal consolidation can be clearly seen is in the telecoms industry where major companies merge with each other, resulting in telecomm companies that are much bigger than they were before the merger. In this case, the reason why the merger is considered horizontal is due to the fact that the separate telecoms companies already offer similar services and are merely joining forces to form a bigger company. The different companies already have their own service packages, customer base, and product lines that can be merged with that of the other company, or companies in some cases.

Of course, such a practice has some fundamental drawbacks, even if it offers the companies some advantages. For one reason, merging companies in such a manner creates instant mega companies that will compete unfavorably with the other competitors in the industry. This creates a situation where there is undue monopoly stemming from the increased power of the mega corporations that will be able to leverage their increased power to the detriment of other smaller companies. A horizontal consolidation also affects consumers negatively, because the reduction in competition and choices reduces the power of consumers who do not have much variety to select from. It also leaves consumers at the mercy of such mega companies that may decide to use their increased power as a means of imposing increased fees and prices on consumers.