A vertical merger is a merger between two or more entities who operate in the same industry but at different levels of the production process. These entities produce similar finished goods or services.
This type of merger occurs frequently because of larger companies attempting to create more efficient economies of scale. A merger is an agreement that unites two existing companies into one new company. There are several types and reasons for mergers.
What is a 'Vertical Merger'. A vertical merger is the merger of two or more companies involved at different stages in the supply chain process for a common good or service. Most often, the merger is purposed to increase synergies, gain more control of the supply chain process, and increase business.
Backward integration is a type of vertical integration that includes the purchase of, or merger with, suppliers. A congeneric merger is a type of merger where two companies are in the same or related industries but do not offer the same products.
The synergies can include operational synergies, which can be improvements in the operational process of the two companies, such as a supplier and a producer. If a producer had difficulty obtaining supplies for its products, or if the raw materials needed for production were expensive, a vertical merger would eliminate the need for delays and reduce costs. A car manufacturer that purchases a tire company is a vertical merger, which could reduce the cost of tires for the automaker. The merger could also expand its business by allowing the manufacturer to supply tires to competing automakers–thus boosting revenue.
Anti-trust violations are often cited when vertical mergers are planned or occur because of the probability of reduced market competition.
Vertical mergers reduce competition and can provide the new single entity with a larger share of the market. The success of the merger is based on whether the combined entity has more value than each firm separately.
Vertical mergers are helpful because they can help improve operational efficiency, increase revenue, and reduce production costs. Synergies can be created with vertical mergers since the combined entity typically has a higher value than the two individual companies.
What Is a Vertical Merger? A vertical merger is the merger of two or more companies that provide different supply chain functions for a common good or service. Most often, the merger is effected to increase synergies, gain more control of the supply chain process, and ramp up business.
Financial synergies can be realized, which might involve access to credit or capital by one of the companies. For example, a supplier might have debt on its balance sheet leading to reduced access to a borrowing credit facility from a bank. As a result, the supplier might experience a shortage of cash flow. On the other hand, the producer could have less debt, more cash, or access to credit, such as a bank. The producer could help the supplier by paying down debt, providing access to cash, and a borrowing facility that the supplier needs to run more efficiently.
Anti-trust violations are often cited when vertical mergers are planned or occur because of the probability of reduced market competition. Vertical mergers could be used to block competitors from accessing raw materials or completing certain stages within the supply chain.
The logic behind the vertical merger is to increase synergies created by the merging firms and increase the overall operational efficiency whereas horizontal merger’s logic is to reduce the competition in the market place creating a monopoly for the business.
While as per another definition on business.gov, “Vertical Merger is a combination of two or more firms involved in different stages of production or distribution of the same product.”. Along with vertical merger, there are few more types of mergers and acquisitions useful for the growth and diversification of the companies businesses.
The economic benefits of the vertical merger are driving many business houses to join hands with other businesses working at different levels of the supply chain for similar products and services. Going ahead, the vertical merger will become a common norm because of many economic benefits. 1–4
Vertical merger helps in bringing efficiency in operations and expanding the revenue streams of the business. It is a strategy for the expansion of company’s business operations into different steps on the same production path.
Sanjay Bulaki Borad. Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".