Horizontal vs. Vertical Acquisition: Know the Difference

Are you considering a business acquisition? Maybe you’ve recognized the benefits of doing so, like cost reduction, scalability, product diversification, or market expansion. And like many companies before you, you’re probably looking into a horizontal vs. vertical acquisition.

After all, these are the two most popular types of business acquisitions. But can you tell the difference between a horizontal or vertical acquisition? Many companies can’t. Even though they are, in fact, quite distinct.

If you’re having similar problems, don’t fret. We have put these two types of business acquisitions head-to-head. See how the horizontal vs. vertical acquisition face-off unfolds.

Horizontal vs. Vertical Acquisition: The Objectives

The first difference that set both types of business acquisitions apart is objective. A horizontal acquisition is done with the aim to merge two companies that offer the same products and services and are at the same level of production.

In this scenario, acquired companies are usually direct competitors of the acquiring company. Hence, we can say the main reason for a horizontal acquisition is to eliminate competition. This, in turn, brings about multiple benefits. By eliminating direct competitors, you will see an increase in market share, cost reduction, and greater revenue and profit.

One example of a horizontal acquisition would be when a company that produces computers decides to purchase another company that also produces computers. This is a horizontal acquisition because both companies are in the same industry and operate at the same level.

On the other hand, a vertical acquisition is when a company acquires another company that is a part of the same industry but at a different production level.

Furthermore, the objective of a vertical acquisition is quite different to a horizontal acquisition. Unlike a horizontal acquisition, which aims to reduce costs and increase profit, the principal objective of a vertical acquisition is to secure the supply of essential goods, avoid disruption in supply, and restrict supply to competitors.

For example, if a clothing company acquires a textile factory, then this is considered a vertical acquisition. The former is part of the tertiary sector, meaning it supplies goods and services to the consumers and businesses, while the latter is part of the secondary sector, meaning it turns raw materials into goods.

The reasons surrounding business acquisitions generally dictate whether a horizontal or vertical acquisition is more appropriate. Furthermore, you should be aware of the key challenges of an acquisition prior to implementing one.

Before choosing between a horizontal and vertical acquisition ask yourself this:

Do I want to increase the size of my business – or do I want to strengthen the supply chain?

Horizontal vs. Vertical Acquisition: Self-Sufficiency

Another major difference between a horizontal and vertical acquisition is the level of self-sufficiency.

Namely, would you rather manufacture the components of your products on your own or would you rather assemble your product using an outside vendor?

A horizontal acquisition concerns itself with the latter, while vertical acquisitions with the former.

With a vertical acquisition, you will have more control over the entire production and distribution process. It will enable you to increase profit by eliminating intermediaries.

Additionally, it will allow you to create custom components that are specialized for your products. And in time, you will be able to enjoy lower production costs, utilize resources better, and avoid wastage. However, be wary that having full control over the production and distribution process can be very expensive and time-consuming.

Ask yourself this: Are you financially, organizationally, and operationally ready to undertake such a huge responsibility? It takes a lot of time and hard work to set up a smooth production and manufacturing process. So it’s better to be safe than sorry.

In contrast, a horizontal acquisition is great for synergy but not so much for self-sufficiency. This is because you rely on outside vendors for production and manufacturing. Access to multiple vendors means less risks and acts as a safety net if something goes wrong with one vendor or another.

Essentially, it comes down to whether you want to have full control over all the processes that lead to creating and distributing your product. Or whether you would rather delegate this process to an outside vendor and focus on your final product. A horizontal acquisition brings synergy but not self-sufficiency, while a vertical acquisition promises greater self-sufficiency.

Before choosing between a horizontal and vertical acquisition ask yourself this:

Do I want to have more control over the production and manufacturing process – or greater synergy?

Horizontal vs. Vertical Acquisition: Diversification

Another major difference between a horizontal and vertical acquisition is the level of diversification and concentration.

A horizontal acquisition lets you diversify your business by extending your product range, namely by combining your existing inventory of products and services with those of a competitor. This way you are able to increase the diversity of your products, tap into news market sectors, and expand into wider geographical markets.

In contrast, a vertical acquisition is much more appropriate if you wish to concentrate on refining your current product range. By acquiring a company that is at a different stage on the same production path you can exercise control over an industry, not just a market.

Before choosing between a horizontal and vertical acquisition ask yourself this:

Do I want to diversify my product range – or concentrate on tweaking existing product range?

Horizontal vs. Vertical Acquisition: Advantages and Disadvantages

The advantages and disadvantages between a horizontal and vertical acquisition also differentiate the two strategies.

Some key advantages of a horizontal acquisition include:

• Eliminates direct competitors.
• Focuses on improving product.
• Gives the benefit of economies of scale.
• Makes it easier to manage due to similar products and processes.

A horizontal acquisition also has some downsides that may be a deal-breaker:

• Less flexibility in introducing innovations.
• Can bring about legal repercussions.
• May lead to a decentralized structure and hinder productivity.

A vertical acquisition has various advantages, too, like:

• Allows more control over the value chain.
• Offers ability to control costs throughout distribution process.
• Blocks competitors from gaining access to scarce resources or important markets.
• Improves supply chain coordination.
• Reduces transportation costs.

Nevertheless, although vertical acquisition does have its perks, it’s not without fault. Some disadvantages of vertical acquisition include:

• Lower production volume.
• Harder to build products at scale.
• Can create market entry barriers.
• Requires a larger capital investment.
• Demands learning the ways of a new sector.
• May cause confusion within the business.

Compare the advantages and disadvantages of a horizontal and vertical acquisition before choosing between the two.

Horizontal vs. Vertical Acquisition: An Overview

A business acquisition is the process of acquiring another company and its assets. The main reason companies decide to go through with an acquisition is to tap into existing strengths and overcome weaknesses.

It’s a smart growth strategy that yields great results over time. Distinguish between a horizontal and vertical acquisition and decide which type of acquisition suits your needs best.