A company looking to grow through acquisition can choose one of two strategies. The first is to focus primarily on horizontal acquisitions. The second focuses on vertical acquisitions. On rare occasions, companies combine the two strategies.
Horizontal and vertical acquisitions have some similarities. However, their differences are more numerous and profound. Companies choose between horizontal and vertical depending on a variety of factors including their goals, where they currently stand, and what their particular industry looks like.
At Mezy, a Utah-based DaaS provider, analyzing horizontal and vertical acquisitions is a normal part of what they do. They say that the due diligence involved with both types of transactions is similar in some ways but different in others. However, the end goal of due diligence is the same either way.
A horizontal acquisition occurs when one company buys a competitor at the same level of the value chain. If you are not sure what the value chain is, the restaurant industry offers a perfect illustration. Consider fast food and fast casual. Both restaurant categories have the same goal: to make money by selling food. But they do things differently.
Every restaurant that sells fast food exists on that level of the value chain. Fast casual restaurants occupy a different level of the value chain as evidenced by how they serve customers. A horizontal acquisition in the restaurant industry would involve a restaurant chain buying a competitor that already operates in a similar manner and has similar goals.
The goal of horizontal acquisition is to facilitate growth at that particular level. Perhaps a company wants to become the market leader. Maybe complete dominance is the goal. Either way, horizontal acquisition is all about growing inside the same value chain.
A vertical acquisition occurs when one company buys another company already operating within the same process vertical, within the same industry. Think of a process vertical as a technology, business process, or other asset that helps the company further its own core products or service in a particular industry.
The technology industry is very susceptible to vertical acquisitions. One example is Google’s 2012 takeover of Motorola. As you know, Motorola was one of the first cell phone companies in the world. Meanwhile, Google was the driving force behind the Android operating system. Acquiring Motorola allowed Google to leverage its technology to expand Android’s reach in the mobile space.
Growth and Expansion Goals
Both horizontal and vertical acquisitions can support a company’s growth and expansion goals. Horizontal acquisitions facilitate growth and expansion by extending a company’s reach within their particular niche. They allow for growth without having to get away from one’s core products and services.
Vertical integration facilitates growth and expansion by building on what currently exists with new technologies, business processes, and even core products and services. How many products and services has Google added to its portfolio through decades of vertical acquisitions?
It goes without saying that both types of acquisitions have their advantages and disadvantages. If you had to choose one as being more risky than the other, it would probably be vertical acquisition. The main trap of moving vertically is extending beyond the company’s ability to maintain a focus on its core. That leads to doing a lot of different things but not doing any of them well.
Now that you know the difference between horizontal and vertical acquisition, can you think of examples of both? Acquisitions happen all the time. It is a normal part of modern business. Some companies choose to acquire horizontally while others are content to go vertically.