Vertical or horizontal mergers – What are the benefits?

When we talk about business growth and expansion there are multiple ways to achieve them. It could be simple as adding a new product or services to a more complex process of merger. In this topic we will specifically cover the two types of merger – Horizontal and vertical merger their aspects,advantages and drawbacks. Depending on the what businesses are trying to achieve whether short term or long term both of these create a positive impact as long as you choose the correct one.

Lets start with the definition of vertical and horizontal mergers

Horizontal merger is a type of merger where business organizations combine together within the same industry. Horizontal merger is quite happens among the organized corporations merging together to have a better market share or become a  market leader. The companies also go head with this merger if they are planning to increase their output but cut down their operating or unit cost.

Vertical merger on other hand takes place when a firms decide to merge with other which may be either the supplier or distributor. In simple terms, a firm might try to add more products in line but at the same time concerned about the overhead costs and efficiency. Merging these components would provide a greater control on the operation reducing costs increasing efficiency.

Few instances of vertical and horizontal mergers in UAE

NBAD and FGB bank merger in 2017 formed a new bank First Abu Dhabi Bank which became the largest bank in the UAE and one of the largest in the MENA region with a total capital of AED 10.9 billion and total assets over AED 670 billion.

Amazon brought Souq, Middle East’s No.1 eCommerce site for $580 million and rebranding into Amazon in UAE. Similarly Souq’s payment gateway provides Payfort was also acquired by Amazon. Souq operates under the same brand name in Egypt and Saudi Arabia.

Its worth mentioning this acquisition as well  

Uber, the global ride-hailing firm brought Careem for $3.1 billion which is considered to be one of the biggest deals in the middle East. Careem was main competitor for Uber since beginning of 2012 when it was found and started on an aggressive expansion spree denting Uber’s revenue and market share.

The deal was considered overpriced but do you think Uber has blindly thrown away money for a just 6 year old startup?

Definitely not! Right decisions come at the right time and with a right price. Careem was certainly a promising brand and Uber will retain it. The deal is expected to be closed somewhere is first quarter of 2020 making Careem a whole subsidiary owned by Uber.

The Pros and Cons of Horizontal merger

Pros –

  • Low cost
  • More control over your suppliers and distributors
  • Offer more products/services
  • More control in the market with better market share
  • No or less competition in the market with better gains

Cons –

  • If merger turns out to be a failure the value of the company can go down considerably.
  • For large corporate mergers governments might interfere or might need their approval which might create a no-deal situation in case it goes against their interest.
  • You might need additional workforce since your organization has multiplied after the merger which means either retaining or hiring resources adding additional cost.
  • It could also lead to job losses.

 

The Pros and Cons of Vertical merger

Pros –

  • Costs are lowered because no negotiation in prices required as you will be the parent company of the distributor
  • Improve efficiency in both production and distribution in sync with each other
  • Improve quality of supplies
  • Secure your distribution channel

Cons –

  • Higher costs if the company is incapable of managing new activities efficiently
  • Lack of competition might lead to overpricing and quality issues
  • Increased bureaucracy and higher investments leads to reduced flexibility
  • Higher potential for legal repercussion due to size

Which one to choose?

We have pointed out both the pros and cons of both vertical and horizontal merger. A vertical merger has a good success rate than a horizontal merger as the change management issues can be more successfully managed. Small businesses can benefit a lot from vertical mergers as it could add to their growth strategy. On other hand, horizontal merger suits well for large corporates who want to expand their businesses geographically or have an edge over competition in the market. If you’re not sure which one to choose from we can guide you towards a successful merger.

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