Mergers and acquisitions are an extremely common type of transaction in the business world; rarely is the company that hasn’t merged or been acquired in some fashion. These transactions are a normal part of the business environment, whether they’re successful ones (Disney and Pixar; Exxon and Mobil) or ones that turn out to be a bust (Sears and Kmart; AOL and Time Warner). There are many flavors of mergers. One of the common types is the vertical merger.
What Are Vertical Mergers?
A vertical merger is when two companies, which provide different supply-chain functions for similar goods or services, combine into one merged entity. In most cases, the purpose of this type of merger is to boost synergies, increase supply and gain greater market share. It takes the resources of both companies involved to produce the finished product or service that is gained by the merger. There are multiple reasons why two companies would want to go through the vertical merger process.
An excellent example vertical merger example is Dell’s acquisition of EMC in 2016. Dell, a computer hardware company, realized that in addition to its products, services were becoming a major profit engine within the industry. Merging with EMC, a data-storage corporation (which was the largest tech deal at the time), allowed the company — now called Dell EMC — to provide both the products and services the industry demanded. Through vertical integration, two companies that provided different things in the supply chain merged as one merged entity to provide a greater range of products and services than either could have provided by itself.
The Benefits of Vertical Mergers
Among the largest benefits of vertical mergers are the reduction in costs and the increase in productivity. In addition, the merged company is able to establish greater control over its supply chain. This vertical integration can result in cost savings, as the company is now in greater control of the overall supply chain, which can result in greater profits, lower costs to consumers or a combination of the two. In addition, a vertical merger creates synergies, including the following:
- Financial synergy. Vertical mergers can help the merged company’s finances by reducing operating costs and using these savings to fund expansion, reduce debt or increase credit.
- Managerial synergy. The management team can be strengthened by streamlining team operations and, in some cases, navigating redundancies.
- Operational synergy. The supply-chain process can be simplified.
How Vertical Mergers Differ From Other Types of Mergers
Another common type of merger is a horizontal merger. As its name suggests, a horizontal integration happens when a company merges or swallows up a competitor in the same space. An excellent example is when T-Mobile and Sprint merged in 2020, when two companies with a similar product and customer base became one. This type of merger merely increases market share and reduces competition in the field.
A vertical merger, by contrast, takes two companies in the same space but operating in different phases in the supply chain and gives the merged company an advantage that the two companies never could have achieved working alone. The takeaway: A horizontal merger is the merging of two similar companies; a vertical merger is two companies in the same general field, but not competitors, merging to achieve greater goals than either company can reach alone.
Another subset of the vertical merger is the issue of forward and backward integration. Forward integration is when a company takes control of an entity that is downstream of its capabilities in the supply chain — for example, a beverage company acquiring a distributor. Backward integration is when a company acquires a company that is upstream of it in the supply chain — such as the aforementioned beverage company acquiring a container-manufacturing company. In both instances, the merged company is taking a far greater role in the supply chain.
What Challenges Lie Ahead?
The biggest challenges of vertical mergers are in the legal arena. As is the case in many business transactions, there are multiple legal issues and vertical merger guidelines to be aware of. There are scores of laws, including federal antitrust laws, that regulate these types of mergers, mainly to prevent companies from becoming monopolies or anticompetitive.
In particular, vertical mergers are subject to the provisions of the Clayton Act, a 20th-century law that helped limit the power of trusts and monopolies to maintain healthy market competition. Under most circumstances, vertical mergers don’t have any legal woes as far as anticompetitive issues are concerned — that’s more common with horizontal mergers. Since 1950, there have only been three vertical-merger cases decided by the Supreme Court.
The CapLinked Solution
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Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer-products industries.
Investopedia — Vertical Merger
American Law and Legal Information — Vertical Merger
Learn Business Concepts — Difference Between Forward Integration and Backward Integration
EDUCBA — Backward Integration
United States House of Representatives: History, Art & Archives — The Clayton Antitrust Act