What Is a Vertical Merger?
A vertical merger is the merger of two or more companies involved at different stages in the supply chain process for a common good or service. Most often, the merger is purposed to increase synergies, gain more control of the supply chain process, and increase business. Also, it often results in reduced costs and increased productivity and efficiency.
Understanding Vertical Merger
Vertical mergers and vertical integration are often used interchangeably; however, vertical integration, the expansion of operations into other stages of the supply chain process, can occur without merging two businesses. For example, a ladder manufacturing company could decide to make its own aluminum rather than purchasing it from suppliers.
Vertical mergers, however, would result in the manufacturing company and the supplier merging.
[Important: The opposite of a vertical merger is a horizontal merger, which involves the merger of two competing companies that produce at the same stage in the supply chain process.]
This type of merger reduces competition and gives the new single entity a larger share of the market. The success of the merger is based on whether the combined entity has more value than each firm separately.
Examples of a Vertical Merger
An example of a vertical merger is a car manufacturer purchasing a tire company. Such a vertical merger reduces the cost of tires for the automaker and potentially expands its business by allowing it to supply tires to competing automakers. This example shows how a vertical merger can be twice as beneficial to the company conducting the integration. Initially, the firm benefits from reduced costs, which lead to increased profits.
The second benefit is an expansion in revenue streams that also increase the bottom line. A notable vertical merger was the 1996 merger of Time Warner Inc., a major cable company, and the Turner Corporation, a major media company responsible for CNN, TNT, Cartoon Network, and TBS. In 2018, a merger between Time Warner and AT&T was finalized but not without intense scrutiny.
As of February 2019, as reported by the Associated Press, the "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 Vertical Merger Controversy
Vertical mergers are not without controversy. Anti-trust violations are often cited when vertical mergers are planned or occur because of the likelihood of reduced market competition. Vertical mergers could be used to block competitors from accessing raw materials or completing certain stages within the supply chain.
Consider the example of the car manufacturer purchasing a tire manufacturer. Suppose this same car manufacturer purchased most of the tire manufacturers in the industry. They could control the supply to the market and the price, therefore destroying fair competition. Some economists also believe that vertical mergers promote collusion among upstream firms.
Key Takeaways
A vertical merger is purposed to increase synergies, gain more control of the supply chain process, and increase business. Anti-trust violations are often cited when vertical mergers are planned or occur because of the likelihood of reduced market competition. Vertical mergers may result in reduced costs and increased productivity and efficiency for those companies involved.