A lateral merger, also known as a horizontal merger, occurs when two companies in the same industry and often at the same stage of the production supply chain combine into a single entity. This type of merger often happens between competitors that sell similar products or services and serve the same markets.
The primary goal of a lateral merger is to achieve economies of scale, increase market share, expand the range of products or services, reduce competition, and increase efficiencies. By combining resources, the merged company can often operate more efficiently and effectively than the two companies could individually.
However, lateral mergers are often closely scrutinized by regulatory bodies like the Federal Trade Commission in the U.S. or the Competition and Markets Authority in the U.K. These bodies are concerned with maintaining fair competition in the marketplace and can block mergers they believe will create a monopoly or significantly reduce competition.
A classic example of a lateral merger is the merger between Exxon and Mobil in 1999, two major oil companies. The merger created ExxonMobil, which became one of the largest publicly traded companies in the world.
Example of a Lateral Merger
Let’s consider a hypothetical example of a lateral merger in the tech industry.
Suppose we have two tech companies, TechA and TechB. Both companies specialize in creating cloud storage solutions and operate in similar markets. They each have their own unique technologies and customer bases, but they compete directly with each other.
Seeing an opportunity to increase market share, improve technology offerings, and achieve cost efficiencies, TechA and TechB decide to merge. They believe that by combining their technologies, they can create a superior cloud storage solution. Furthermore, by merging, they can consolidate their marketing efforts, reduce duplicated administrative costs, and increase their bargaining power with suppliers.
After the merger, the new entity (TechAB) controls a larger portion of the cloud storage market and provides more advanced and diverse solutions to customers. It also enjoys cost efficiencies due to reduced competition and economies of scale.
However, this merger would likely attract the attention of regulatory bodies, as it could potentially reduce competition in the cloud storage market. These regulators would assess the merger to ensure that it doesn’t create a monopoly or unfairly disadvantage other competitors.
This is a simplified hypothetical example, but it gives an idea of how lateral mergers work and what their potential benefits and challenges might be.