Companies that operate a horizontal acquisition strategy acquire companies in a similar market sector typically selling a complimentary product into the same market. The aim is to acquire additional products or services to offer their customers or to increase market share. This is the overwhelming majority of acquisitions.
Horizontal acquisitions give a buyer a number of advantages. By acquiring a company, the buyer subsumes the products and market share of the acquired company. The result typically is increase revenue by selling more products to existing customers and new products to new customers while reducing operating costs.
By operating a vertical acquisition strategy, companies aim to secure access to essential supplies, components or distribution channels by acquiring suppliers in their distribution channel. Vertical acquisition also weakens competition or creates barriers to market entry by depriving competitors of access to essential supplies.
A key difference between horizontal and vertical acquisition is the focus on cost or revenue. A primary objective of horizontal acquisition is to grow revenue by increasing market share or expanding a product range. In vertical acquisition, the emphasis is on reducing costs by eliminating procurement costs and increasing supply chain efficiency.
Horizontal acquisitions represent the overwhelming number of acquisitions. In vertical acquisitions, often the cultural fit between the buying company and its supplier simply doesn’t fit.
Regardless of the type of acquisition, we have found that only 8% of owners selling their companies were even aware of the eventual buyer of their company. The only way to be truly sure which type of acquisition will apply is to confidentially open the market.