Businesses consolidate to grow profits and reward shareholders.
Consolidation is designed to increase overall efficiencies and profits. Horizontal consolidation signals that a particular industry has reached a new stage within its life cycle. Of course, consolidation is not to be confused for monopoly power.
Identification
Horizontal consolidation occurs when firms offering similar products combine through mergers and acquisition. Horizontal consolidation may also represent an extension of product lines. Clothiers can consolidate horizontally to combine casual menswear, suits and cologne beneath one institution.
Benefits
Horizontal consolidation enables firms to pool resources into one entity. Consolidation strengthens the financial position of the new company, so management may negotiate better terms with creditors and suppliers. Savings are passed down to consumers in the form of lower prices.
Considerations
Growing industries consolidate prior to reaching a mature stage of development. This consolidation occurs when emerging companies purchase start-ups to expand market share. Conversely, older industries consolidate to survive. Struggling companies are often forced to sell out---or go bankrupt.
Misconceptions
Horizontal consolidation differs from vertical integration. Vertical integration happens when companies expand across their supply chain. Vertically integrated oil companies purchase oil drillers, refineries and gas stations.
Risks
Horizontal consolidation that leads toward monopoly draws criticism from consumers and the government. The Federal Trade Commission enforces monopoly law and blocks anti-competitive mergers.
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