Meaning of Vertical Merger
A vertical merger is a merger between two or more entities who operate in the same industry but at the different levels of the production process. These entities produce similar finished goods or services. 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.
Vertical Merger Business Definition
As per the business definition of Vertical Merger on MBDV.Gov, “Vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.” 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.”
Vertical Merger Example
XYZ Ltd. is a textile manufacturer. ABC Ltd. is the supplier of cotton to XYZ Ltd. since many years. XYZ Ltd. and ABC Ltd. decide to merge their business. We can see that both the business entities are involved in the different stages of the production process. The reason for merging is to bring efficiency in operations by cutting the extra costs and increase the profits of both the businesses.
Vertical Merger and Horizontal Merger
Vertical merger and horizontal merger are two separate concepts. It usually takes place between a manufacturer and a supplier whereas horizontal mergers take place by acquiring the competitor who is in the same line of business as of the acquiring company.
The main aim of a vertical merger is to increase the market share, improve efficiencies and maximize cost savings to realize higher profits while horizontal merger aims at expansion of the company’s product range and increasing its revenue by selling more and more goods or services.
It is also known as ‘Vertical Integration’ can take place either through forwarding integration or through backward integration. On the other hand, horizontal merger better known as ‘Horizontal Integration’ consists of the acquisition of companies in the same industry, producing similar goods or services.
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.
A vertical merger is becoming an integral part of many business strategies nowadays. 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