Vertical Merger

Reviewed by Athena | Updated on Aug 27, 2020

Introduction

A vertical merger is a merger between two or more companies who are a part of the same industry, but are at different stages of the supply-chain for the same product or service. One of the companies could be producing the raw materials, and the other, the finished products. It is a synergy between these organisations who pool in their resources, to achieve increased profitability.

An example of a vertical merger could be a company producing organic packaged food mergers with an organic farm, so both organisations gain by integrating their operations.

Benefits of a Vertical Merger

1. Increased profitability One of the major objectives of a vertical merger is increased profitability. The integration of businesses forming part of a supply-chain eliminates the uncertainty of procuring raw materials, maintains tighter quality control, and promotes revenue growth, therefore leading to increased profitability.

2. Ease of operations and reduced operational costs It promotes ease of operations especially for mergers where supply of raw materials are synced with the manufacture of finished products. Operational costs with regard to inventory management can be saved. The management will have better control over overall supply-chain processes.

3. Synergy A vertical merger contributes to various beneficial synergies such as operational synergy, financial synergy and managerial synergy. The borrowing base of capacity of the company increases, along with its credit-worthiness.

Drawbacks of a Vertical Merger

There are a few drawbacks associated with a vertical merger.

1. Managerial complications A merger of two or more companies could result in retrenchment of staff including key managerial personnel. The decision-making process can also get affected with multiple executives across the merged organisations vying to be in control, and take important decisions impacting the overall working of the organisation.

2. Increased administrative costs While operating costs get reduced in a vertical merger, administrative and bureaucratic costs could increase, thereby increasing the total overall costs. These costs could outweigh the benefits of the merger.

3. Differences in corporate cultures Corporate culture differs across organisations, and hence finding the perfect equilibrium between employees and managers of the two or more merged companies could be challenging. Before a merger is carried out, the operating and managerial culture of the merging companies should be introspected and integrated seamlessly.