How are direct costs allocated differently than indirect costs?
Horizontal integration, also known as lateral integration, describes the merging of two or more companies that are at the same part of the production supply chain. They can be in the same or different industries. Here are three textbook examples of horizontal integration, made by companies looking to strengthen their positions in the current market and enhance their current production and/or distribution stage.
One of the clearest examples of horizontal integration is Facebook’s acquisition of Instagram in 2012 for a reported $1 billion. Both Facebook and Instagram operated in the same industry (social media) and were in similar production stages in regard to their photo-sharing services. Facebook, looking to strengthen its position in the social sharing space, saw the acquisition of Instagram as an opportunity to grow its market share, reduce competition and access new audiences. All of these things came to pass, resulting in a high level of synergy.
Another key example of a horizontal integration was the Walt Disney Company’s $7.4 billion acquisition of Pixar Animation Studios in 2006. Disney had started out as an animation studio that targeted families and children. But it was facing market saturation with its current operations, along with a sense of creative stagnation. Pixar operated in the same animation space as Disney, but it had more cutting-edge technology when it came to digitally animated movies, along with more innovative vision. A decade later, the deal was widely seen to have reanimated Disney, not to mention expanding its market share and increasing profits.
Finally there is the 1998 merger of two major oil companies, Exxon and Mobil – the biggest in corporate history at the time, combining the first and second largest energy corporations in the U.S. Officially, Exxon bought Mobil for $73.7 billion, and the purchase enabled Exxon to gain access to Mobile’s gas stations as well as its product reserves. Thanks to the pooling of resources, increased efficiency in operations and streamlining of procedures, today, ExxonMobil is the biggest oil company in the world, and the 10th largest by revenue. Shareholders have quadrupled their money.
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