What is a vertical merger?

The combination of two or more businesses that handle various supply chain tasks for a shared product or service is known as a vertical merger. The main goals of mergers are to increase synergies, gain greater control over the supply chain process, and expand the company. Costs are often lowered, and efficiency and production are raised via vertical mergers.

Knowing About Vertical Mergers

Businesses that control the early phases of their supply chain—such as a supplier supplying raw materials to a manufacturer—benefit from vertical mergers. In a vertical merger, the two businesses provide distinct products or services but are in different production cycle phases. Nonetheless, developing the final item requires the cooperation of both businesses.

Through vertical mergers, the merged company has less rivalry and a more significant market share. Whether the merged company is worth more than each company alone will determine whether the merger is successful.

The advantages of vertical mergers

Vertical mergers are beneficial because they save manufacturing costs, boost income, and enhance operational efficiency. Vertical mergers may result in synergies, as the merged firm usually has a higher value than the two separate businesses.

Upgrades to Operations

Operational synergies, or advances in the two organizations’ operational processes (as a producer and a supplier, for example), are one kind of synergy. A vertical merger would remove the need for delays and save expenses if a manufacturer had trouble finding suppliers for its goods or if the raw materials were pricey. A vertical merger occurs when an automaker buys a tire firm, potentially lowering the tire cost for the vehicle manufacturer. By enabling the company to offer tires to rival automakers, the deal may also allow it to grow its business and increase income.

Monetary Synergies

Financial synergies may be achieved, including one of the firms’ access to money or credit. For instance, getting a bank credit facility may be more challenging if a supplier has debt on its balance sheet. The provider may thus need more cash flow. However, the producer can be in better financial standing, have more cash on hand, or have access to financing via a bank. To assist the supplier in operating more profitably, the producer might pay off debt, provide the supplier access to cash, and provide the borrowing facility the supplier requires.

Supervisory Efficiency

Consolidation or decrease of the merged firms’ senior management team might be one improvement. The business may enhance combined entity effectiveness and communication by getting rid of underperforming managers and replacing them.

Vertical Integration vs. Vertical Merger

Despite their frequent interchangeability, “vertical merger” and “vertical integration” differ. Expanding operations into additional supply chain stages is possible without joining two enterprises via vertical integration. For instance, a vertically integrated corporation may choose to make aluminum for the finished product rather than sourcing it from vendors. In contrast, a vertical merger would combine the supplier and the production business.

A horizontal merger, which unites two rival businesses that produce at the same step of the supply chain process, is the reverse of a vertical merger.

Vertical Combination Agreement

There is debate concerning vertical mergers. When vertical mergers are proposed or take place, antitrust breaches are often charged due to the likelihood of decreased market competition. Through vertical mergers, rivals may be prevented from obtaining raw materials or finishing certain supply chain phases.

Remember the last instance when a vehicle manufacturer bought a tire company? Let’s say the same automaker acquired most tire producers in the sector. It may thus set the price and supply for the market, eliminating “perfect” or fair competition. Furthermore, some economists think that upstream firms—those engaged in the first production phases—may collude more efficiently due to vertical mergers.

An Actual Case of a Vertical Merger

The 1996 merger between CNN, TNT, Cartoon Network, and TBS networks’ parent company, Turner Corporation, and Time Warner Inc., a significant cable business, was a noteworthy example of a vertical merger.5. The merger of Time Warner and AT&T (T) was completed in 2018, but not before it was subject to considerable criticism.

“A federal appeals court cleared AT&T’s takeover of Time Warner, rejecting the Trump administration’s claims that the $81 billion deal will harm consumers and reduce competition in the TV industry,” the Associated Press reported in February 2019.

According to the acquisition’s financial data, the merged company will have enhanced financial synergies of $2.5 billion. Within three years of the deal’s closing, $1.5 billion in cost savings and $1 billion in revenue synergies are anticipated.

Conclusion

• A vertical merger between two businesses aims to boost industry, strengthen control over the supply chain process, and maximize synergies.
• When vertical mergers are proposed or take place, antitrust breaches are often charged due to the likelihood of decreased market competition.
• For the participating firms, vertical mergers mean reduced expenses and more production and efficiency.