Best Practices

Vertical Merger Definition and Example

Jonathan Friedman
September 24, 2021
Vertical Merger Definition and Example

Are you looking to grow within your market? Do you want to cut costs and see your business grow?


If so, you may want to consider a vertical merger. This is a kind of business deal that can become lucrative for all who are involved. This is not to mention the increased presence within the marketplace.


To learn more about the vertical merger definition, keep reading. We'll share everything you need to know so that you can decide whether or not this business deal is the right one for you.

Below is everything we will cover. Feel free to skip ahead.


What is the vertical merger definition?


Different from a horizontal merger, a vertical merger involves two or more companies that are involved at different stages in the supply chain process for the same good or service. Often, this means that a manufacturer and a supplier are merging. 


Usually, these entities merge in order to increase efficiency within their organizations. Thus, they have the ability to bring in more business.


Because of this pattern of thinking, vertical mergers are seen as strategic business tools. Each participating company stands to gain from the deal.


The synergies behind a vertical merger


Vertical mergers create three kinds of synergies:


  1. Financial Synergy
  2. Managerial Synergy
  3. Operating Synergy


Each one of these synergies makes it possible for each business to decrease costs while increasing efficiency.


Financial synergy


Vertical mergers help get rid of financial constraints that smaller businesses may have previously had. This newly merged business can use its funds to expand the merging company and grow its debt capacity.


At the same time, this will reduce costs for the company and increase credit.


These financial wins only serve the business positively. Moreover, it can help the company grow beyond the merger.


Managerial synergy


A large business deal like a vertical merger has a way of solving existing problems in management. This means that you'll have the ability to identify and remove less efficient team members. Then, you can find better team members that will do more to serve your business.


In the end, you'll be able to construct a great management team. In turn, you can build an even better company.


Operating synergy


Vertical mergers can also help your business create better administration and operation among the supply chain. You can do this by combining the efforts of both companies.


The expertise and experience from both companies will help the newly merged company avoid more problems. In essence, it serves the common business idea that one plus one is greater than two.

Thus, two businesses working together are more valuable than they are apart.


Why do vertical mergers matter?


Vertical mergers allow manufacturers to have more control over their business if they do their due diligence. By merging with suppliers, manufacturers have the ability to increase their profits and expand their business.


But, vertical mergers do more than benefit the manufacturers. All stakeholders and parties involved can gain from the merger. 


All in all, vertical mergers bring two companies together. This allows each company to benefit from the other company's resources. In turn, they can have a more significant hold on the market together.

And, vertical mergers allow each business to focus on its own goals while working for the greater good of the merged company. 


Let's look at some other ways that vertical mergers can help businesses become bigger and more successful.


Better management


Any kind of significant change within a business can lead to managerial changes. Vertical mergers are just another example of this.


Vertical mergers allow companies to restructure. In turn, they can take the best staff from each company and allow them to work together.


Unfortunately, this does lead to some layoffs. But, when it comes to your business, it's all for the better.


If you're able to choose an effective, hard-working team, you can further benefit your business. These leaders can help guide the productivity and innovation that your company needs to succeed.


Increased profits


Vertical mergers also made it easier for companies to gain higher profits. When companies merge, they're able to grow within the market. In turn, they take up more of the market space.


The larger the share of the market, the more potential for profits.

So, the growth of the business from the merger lends itself to market and financial growth.


Controlled costs


Because vertical mergers bring together suppliers and manufacturers, they can cut excess production and distribution steps. Thus, both companies save money during these processes. 


Production moves from a third-party source to a different department of the same company. Thus, the merged company has more control over the costs that it's paying for production.


Quality control


After a vertical merge, companies have more control over their product. Rather than sending their plans out to a third-party business, they have access to their production in-house.

So, they can see and control what's happening at their very own facility. 


Plus, lower production costs mean that the company can spend more on higher-quality materials. Overall, it's a win-win for the company and its customers.


What are the benefits of a vertical merger?


The number one reason for companies undergoing vertical mergers is to get more control over the supply chain. By doing this, a company can have more market power.


One of the most significant advantages of doing this is the reduced costs. Since the merged company has control over the supply chain, it can lower its cost of production. This brings a considerable advantage over other companies in the same market.


Vertical mergers can also give companies a sense of independence from third-party manufacturers. What used to be a third-party business is now a part of the merged business. So, the newly formed company doesn't have to rely on third-party suppliers.

In the end, this allows the business to make higher-quality products without having to depend on third-party developers.


Vertical mergers can also help with the innovation process. Because the merger combines two companies with different kinds of expertise in the same product/service, the resulting company is smarter.


Combining these two companies leads to a more knowledgable, marketable organization. This means that the newly merged organization will better understand the market, customer preferences, product, production process, and more.


During the merging process, there are technological advancements as well. The newly merged company may obtain patents, permits, resources, and new technologies. These assist the company in growing despite competition in the market.


Overall, this allows the resulting organization to innovate and evolve faster than other companies.


What are the drawbacks of vertical mergers?


Like any business deal, there are some drawbacks that you have to consider. No vertical merger comes without barriers to change.


So, you should consider these drawbacks if you're thinking about undergoing a vertical merger.


Extra costs


In some cases, vertical mergers may cause costs to increase. This occurs when there are too many fees/bureaucratic costs involved.

Sometimes, these payments can completely change the financial stipulations behind a vertical merger. In turn, the vertical merger is no longer financially beneficial. 


If you try to continue with the merger with these costs, there may be a failure to thrive. Thus, both companies would fail.


However, you can handle this problem if it comes up in your merger. The key is having a strong integration plan. With this, you can identify excess costs and get rid of extraneous processes. 


Layoffs


Layoffs are inevitable when two companies merge. It isn't easy to hold onto every single staff member.


Sometimes, these layoffs lead to the loss of key personnel. You may even end up losing some of these staff members outside of decided layoffs. Some employees aren't able and willing to keep their positions with the company after a merger.


Ultimately, these kinds of decisions come down to the best personnel for the merger. The best people for your individual company may not be the best people for the merged company.

During this time, it's essential to stay communicative and transparent. You wouldn't want to catch any employees by surprise.


Failed integration


Vertical mergers can also fail when two company cultures can't integrate well. These two companies have different processes, different motives, and different expectations.


Sometimes, company cultures can merge without any problems. But, sometimes, merging just doesn't go well.


In order to make sure that this doesn't happen, both companies have to have a plan for situating both sets of employees. Each company has to understand how the other company does things. And, both companies have to settle on a new way of doing things once the merger begins.


As you're devising a plan, you have to account for management styles and operational guidelines. These are likely to be different across companies and even across employees.


Are vertical mergers legal?


Vertical mergers are legal. But, the government monitors them closely. The government has to approve every vertical merger.

Specifically, you have to get approval from the Federal Trade Commission, the Antitrust Division, and the Department of Justice.


Usually, vertical mergers can cause trouble when it comes to anti-trust violations. This is because these mergers can significantly reduce the amount of competition within a market. In turn, the merger could lead to a monopoly or an oligopoly.


With one or a few businesses leading the market, consumers would suffer. So, the government has to control this kind of market activity.


Vertical mergers can also cause problems when it comes to resources. Because the manufacturer is absorbing the supplier, other companies are left with fewer suppliers to pick from. So, there is less access to raw materials.


When it's done correctly, a vertical merger is legal. And, it can actually improve the market by giving more innovation and growth.


Vertical merger examples


Since the early 1990s, there have been several successful vertical mergers. It would be best if you didn't let the government guidelines scare you from pursuing one.


With that said, let's look at some great examples of successful vertical mergers.


BBC


BBC has vertically integrated with all parts of entertainment. They have television, radio, and online entertainment. With this, they've merged with distribution centers, included books, and branched out to children's entertainment.


From games and sports to weather and news, BBC has it all. And, they're better for it.


They have successfully started and managed a vertically merged company. And, you can, too.


More vertical merger examples


Vertical mergers are rare, but there are a few other examples that we'd like to share:



To be clear, each one of these companies had to get approval before merging. Vertical mergers are few and far between, but they aren't impossible.


As long as you can prove that the merger won't negatively affect the markets, you should get approval from government entities in charge of mergers like these.


In the long run, fighting for the vertical merger will be worth it. As long as both companies have clear post-merger integration plans, the merger should run smoothly. And, you'll both be able to take advantage of all of the financial and market advantages that come with the merger.


Keeping clear communication


Now that you know all there is to know about the vertical merger definition, it's time to talk about how you can save yourself from the disadvantages. As your company grows after the merger, you may find issues in communication.


Luckily, we have something for that. Our all-in-one collaboration platform built for M&A can help your staff get more organized than they ever have been.


Whether they're worried about big projects or daily tasks, our platform can handle it.