What is a Vertical Merger? Advantages and Disadvantages

Mergers and acquisitions are a process through which companies expand their operations. While they can also do so through organic growth, it may not be feasible. Therefore, companies will seek to combine their resources to expedite the process. This process is crucial in several regards. In most cases, companies use it to expand into new markets or new products.

With mergers, companies combine their resources to increase their market share. Sometimes, it can also be crucial in obtaining a competitive advantage. Some companies also use this process to create synergies, leading to reduced costs. Regardless of the reason, mergers can be significantly crucial in helping companies explore new markets. However, mergers can be a lengthy process and cause some issues.

Mergers can occur in different forms. Usually, companies create a strategy that helps decide if these are necessary. In some cases, companies may explore substantially different markets. However, some companies may also expand operations within the same supply chain. Within this process, companies can use vertical and horizontal mergers. For this topic, the focus will be the former.

What is a Vertical Merger?

A supply chain is a network between a company and its suppliers and customers. In essence, it includes parties involved in producing and distributing products and services. Within each chain, a company may lay in a different position. For example, a supplier of raw materials resides on top of the supply chain. On the other hand, distributors lay on the bottom. Together, they form the whole network.

A vertical merger occurs when two companies within a supply chain merge. However, these companies must provide different supply chain functions. Therefore, a vertical merger involves a company joining its suppliers or distributors. A horizontal merger is when two companies that offer the same supply chain functions merge. While both can be crucial, they are significantly different.

Vertical mergers allow companies to merge with a part of the supply chain. Through this, they can control more services within it. Similarly, it can provide access to better resources. In contrast, companies can control their distribution channels better through forwarding vertical mergers. Either way, the increased supply chain functions can help companies expand their operations.

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In essence, vertical mergers allow companies to bring in-house services and products. If companies don’t use this strategy, they must outsource those functions. While it can result in lower costs in some cases, it may also cause loss of expertise. Despite that, vertical mergers can be critical in increasing revenues. With more of the supply chain, companies can also achieve a competitive advantage.

Overall, vertical mergers involve two companies within a supply chain merging their operations. However, these companies must control different functions within that chain. If the merger is between companies of the same level, it falls under a horizontal merger. With vertical mergers, companies can gain higher control of the overall process.

What is the Difference Between Vertical and Horizontal Mergers?

The difference between vertical and horizontal mergers is the level of supply chain at which they occur. As mentioned, a supply chain may consist of various parties. Vertically, it includes suppliers and distributors. These parties do not control the same functions as each other. Therefore, each company on the vertical line will have a different role within the supply chain.

On the other hand, a supply chain may also include companies that control similar functions. Usually, these companies are competitors that compete for the same customer base. These companies fall on the horizontal line. Each company within the supply chain will have competitors. These competitors are also crucial in completing the supply chain.

With a vertical merger, companies merge operations with suppliers or distributors. Therefore, these mergers lie on the vertical axis of the supply chain. In essence, vertical mergers involve two companies that control different functions on this chain merging. On the other hand, horizontal mergers involve merging with competitors or similar companies. Essentially, it involves two companies that control similar functions on a supply chain merging.

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The difference between vertical and horizontal mergers also includes the objectives for the process. In most cases, companies use the former to expand their operations. They can strengthen their supply chain, reduce production costs, capture upstream or downstream profits, etc. However, horizontal mergers involve merging with the competition.

Overall, both vertical and horizontal mergers involve expanding business and operations. However, both processes take a different approach it. With vertical mergers, companies merge with their suppliers or distributors. On the other hand, horizontal mergers involve controlling the competitors. The benefits from each process differ. However, both can be crucial in helping companies expand.

What are the Advantages of a Vertical Merger?

Vertical mergers can have significant benefits for both companies involved. This process gets some of its advantages from the expansion it provides. However, it can also get some benefits from the use of merging with other supply chain participants. Some of the primary advantages of the vertical merger process include the following.

Operational efficiency

With vertical mergers, companies can achieve operational efficiency. Through this, they can improve their operations. As mentioned, these mergers involve merging with a supplier or distributor. Consequently, they can control their raw materials and distribution channels. Therefore, they can accomplish operation synergies.

Financial advantage

One of the most critical factors within vertical mergers is the financial advantage they bring. This process helps eliminate financial constraints between two companies. Similarly, they can help reduce the cost of capital and achieve better creditworthiness. Companies that merge can also get favorable pricing, which can help lower costs even further.

Increase resources

When companies merge, they combine their resources to conduct operations. Vertical mergers can help companies combine their assets and other resources to obtain similar goals. On top of that, they can also enable companies to increase their profitability. This profitability also improves due to the lower costs from the vertical merger.

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What are the Disadvantages of a Vertical Merger?

Despite their advantages, vertical mergers can also have some disadvantages. These disadvantages relate to the process involved to complete these mergers. On top of that, they can also come from increased control over the supply chain. Nonetheless, some of the primary disadvantages of vertical mergers include the following.

Managerial challenges

Vertical mergers can be challenging to handle. These mergers can cause redundancies with a company, which can increase costs. On top of that, they may require companies to restructure their operations to compensate for the new processes. In some cases, the decision-making process may get complicated due to the merged organizations.

Increased costs

While vertical mergers can help reduce costs, some other expenses may increase. Primarily, the operating expenses that companies incur from the process can rise. On top of that, vertical mergers involve companies expanding into a new market. Controlling and coordinating these operations with the primary activities can increase the costs.

Cultural differences

One of the critical issues with vertical mergers is the cultural differences between both companies. Each company within this process will have its own culture. When these combine, it may create several disputes or clashes. Furthermore, managing those issues can be challenging and lead to increased costs. For companies, it is crucial to consider the cultural differences before concluding the transaction.

Conclusion

Companies seek to expand their operations into new markets and products. Consequently, vertical mergers can be a crucial approach. This process involves two companies controlling different functions with a supply chain merging. However, vertical and horizontal mergers differ due to the process and outcomes. There are several advantages and disadvantages of vertical mergers, as listed above.