Vertical merger is the integration of two or more companies from the same sector but from a different stage of the production process and supply chain under the same entity.
The vertical merger consists of the integration of different companies that work at different stages of the process of preparing a good or service in the same corporate entity. In such a way that companies that are currently clients and suppliers of each other, form a larger group that covers all or a good part of the whole process of elaboration .
Imagine, for example, a perfume company that acquires one of the main perfume distribution chains (vertical forward fusion). Or if that same perfume company acquires companies that supply it with packaging, raw materials, communication, etc. This would be a case of backward vertical fusion.
Types of vertical fusion
This decision of vertical merger will be motivated by the importance that each agent has in the production process and whose services fall within the exclusivity or draft for another collaborating company. Vertical fusion can be established in two types:
- On the supply side:As appropriate to control or create a single entity on the supply side, in which case it must be merged with the suppliers,
- On the side of distribution and sale:In this case it will be convenient to start the same entity with customers and distributors. With this fact, not only the decision power is increased, but also that of buying from other possible suppliers, of which they are also now competitors.
The main reasons for a vertical merger is the control of a part that is considered strategic within the production process. For example, it can be advantageous for one of the parties or for both to merge with a supplier or with a customer if it is considered that this part of the production process is of vital importance to the company, so much so that it is best to control it entirely, and also , make sure that from now on that supplier or customer that we consider good is dedicated entirely to us.
Forms of vertical fusion
The merger can be forward or backward, depending on the integration with a customer or supplier.
- Vertical merger forward:This is the merger with a collaborating agent in the next phase of the production process and that performs the role of client for the company. This may occur because there is an interest for both of them to control the next phase or distribution of a product because it is considered strategic and of vital importance.
- Vertical backward fusion:This is the integration between a company and another that performs an earlier phase of the production process, that is, with a supplier. This can be done to ensure the provision of certain raw materials that are important to the company with which it merges.
Examples of vertical fusion
Next we will show an example of vertical fusion for each case. That is, an example for forward fusion and an example for backward fusion.
- Example of forward vertical fusion: Suppose a company A is dedicated to growing vegetables. This company sells those vegetables to another company B. Company B packages the product and sells it to supermarkets. The forward merger would occur in the event that company A decides to be part of the packaging and final sale of the product. That is, it is integrated into the next phase of the process.
- Example of vertical merger backwards:Now, suppose a company A that sells clothes. Buy the clothes from another company B. Company B is the one that manufactures the product. In the event that company A acquires company B and starts manufacturing clothes, we would face a vertical backward merger. That is, it is integrated in the previous phase of the process.