Define a horizontal merger. How can a horizontal merger produce synergy benefits?
http://www.investopedia.com/terms/h/horizontalmerger.asp#axzz1y5TifbfM
http://en.wikipedia.org/wiki/Synergy
A horizontal merger occurs when two companies operating in the same industry and at the same stage of production combine their businesses. It involves the consolidation of firms that have similar products or services and target the same customer base.
To understand how a horizontal merger can produce synergy benefits, we need to first define synergy. Synergy refers to the combined effect of two businesses that can result in a greater outcome than the sum of their individual performances. In other words, when two companies merge horizontally, they can achieve efficiencies and advantages that are not possible when operating separately.
Here are some ways a horizontal merger can produce synergy benefits:
1. Economies of scale: By merging, the combined entity can benefit from economies of scale, as they can now produce and operate at a larger volume. This can lead to cost savings in areas such as purchasing, production, and distribution, resulting in lower costs per unit.
2. Increased market share: A horizontal merger allows companies to expand their market share by eliminating competition and consolidating their customer base. By reducing competition, the merged entity can potentially gain more pricing power and market dominance.
3. Complementary resources and capabilities: Merging companies often bring complementary resources and capabilities to the table. For example, one company may have strong R&D capabilities, while the other has an extensive distribution network. By combining these strengths, the merged entity can leverage their combined resources to develop new products, improve existing ones, or enhance their market reach.
4. Elimination of duplicate functions: When two companies merge, there are often duplicate functions that can be eliminated, resulting in cost savings. For instance, a merged entity may need only one administrative team instead of two. By streamlining operations, the merged company can reduce overhead expenses and improve overall efficiency.
5. Enhanced bargaining power: A larger combined entity resulting from a horizontal merger may have increased bargaining power with suppliers, customers, and other stakeholders. This improved leverage can lead to better terms, pricing, and agreements, ultimately benefiting the merged company.
To evaluate the potential synergy benefits of a horizontal merger, companies typically conduct in-depth analysis and due diligence. This includes examining financial statements, market projections, competitive landscapes, and potential cost savings. Additionally, regulatory bodies often assess proposed mergers to ensure they do not create anticompetitive practices or harm consumers.