As businesses continue to grow and expand, many companies look towards acquisition as a means of achieving faster growth and gaining a competitive advantage. Two commonly used strategies for acquisition are vertical vs. horizontal acquisitions. While both have their advantages and disadvantages, companies need to understand which strategy will best suit their growth goals.

According to a report by Boston Consulting Group, In the first half of 2024, global M&A activity reached $1.0 trillion. This shows that businesses are actively seeking ways to accelerate their growth through various means such as mergers and acquisitions.

But what exactly are horizontal and vertical acquisitions, and how do they differ? Let’s take a closer look at these two strategies.

What is a Horizontal Acquisition?

A horizontal acquisition, also known as lateral acquisition, occurs when one company acquires another company in the same industry or market. This type of acquisition is typically done to gain access to new markets, expand their customer base, or eliminate competition.

One prominent example of a horizontal acquisition is Facebook’s acquisition of Instagram for $1 billion in 2012. With this strategic move, Facebook not only gained control over a popular social media platform but also eliminated potential competition in the photo-sharing space.

Benefits of Horizontal Acquisition

• Increase market share: By acquiring a competitor or another company in the same industry, businesses can gain a larger market share and establish dominance in their market.
• Eliminate competition: Horizontal acquisitions are often done to eliminate competition and secure a dominant position in the market. This helps companies maintain higher profits and control over pricing.
• Economies of scale: By combining resources, production capabilities, and distribution channels, horizontal acquisition allows companies to achieve economies of scale. This leads to cost savings and increased efficiency.

Drawbacks of Horizontal Acquisition

• Potential for regulatory scrutiny (antitrust laws): When a company acquires its competitors or other players in the same industry, it raises concerns about monopoly and anti-competitive behavior. This may lead to regulatory scrutiny and potential legal challenges.
• Integration challenges: Merging two companies can be a complex process, especially when it involves integrating different corporate cultures, systems, and processes. This may lead to delays and complications in achieving the desired synergies.

What is a Vertical Acquisition?

A vertical acquisition occurs when a company acquires another company involved in different stages of the same supply chain. For example, an e-commerce company acquires a manufacturing facility or a distributor.

One well-known example of a vertical acquisition is Amazon’s acquisition of Whole Foods for $13.7 billion in 2017. This move allowed Amazon to gain control over its supply chain and distribution network, leading to increased efficiency and cost savings.

Benefits of Vertical Acquisition

• Control over the supply chain: By acquiring companies involved in different stages of the supply chain, businesses can have better control and visibility over their operations. This leads to improved efficiency and reduced costs.
• Reduction in production costs: Vertical acquisition allows companies to integrate different business operations, leading to cost savings and improved production efficiencies.
• Increase in competitive advantage: With a vertical acquisition, companies can gain a competitive advantage by owning their entire supply chain and having more control over their products or services.

Drawbacks of Vertical Acquisition

• The complexity of managing different business operations: Acquiring companies involved in different stages of the supply chain can be challenging as it requires effective management of diverse business operations.
• Risk of losing focus on core competencies: With a vertical acquisition, there is a risk of diverting resources and attention away from the company’s core competencies and diluting its competitive advantage.

Horizontal vs. Vertical Acquisitions: Which Strategy Will Skyrocket Your Growth?

The decision to pursue a horizontal or vertical acquisition depends on various factors such as:

• The company’s growth goals
• Market conditions
• Availability of suitable targets. 

Both strategies have their own set of benefits and drawbacks that must be carefully considered before making any strategic moves.

For companies looking to expand their market share quickly or eliminate competition, a horizontal acquisition may be the ideal strategy. On the other hand, if a company wants more control over its supply chain and operations, a vertical acquisition may be the way to go.

Final Thoughts

As companies continue to strategize for growth and look towards M&A as a means of achieving their goals, it is important to understand the differences between horizontal and vertical acquisitions. By carefully considering factors such as market conditions, company goals, and potential risks, businesses can make decisions on which strategy will best suit their growth plans. 

Whichever strategy is chosen, successful execution and integration are important for achieving desired synergies and maximizing the value of the acquisition. In conclusion, whether it’s through a horizontal or vertical acquisition, strategic decision-making plays a key role in increasing a company’s growth.