Vertical merger is the integration of two or more companies from the same sector, but from different stages of the production process and supply chain. Thus, all these companies end up under the same entity.
The vertical merger consists of the integration of different firms that work in different stages of the process of elaboration of a good or service in the same corporate entity. In this way, companies that are currently clients and suppliers of each other become a larger group that covers all or a good part of the entire production process.
Imagine, for example, a perfume company that acquires one of the main perfume distribution chains (vertical merger forward). Or if that same perfumery company acquires companies that supply it with packaging, raw materials, communication, etc. This would be a case of vertical back merge.
Types of vertical blending
This vertical merger decision will be motivated by the importance that each agent has in the production process and whose services are framed within the exclusivity or scope for another collaborating company. Vertical blending 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 merge with the suppliers,
- On the distribution and sales side: In this case, it will be advisable to start the same entity with customers and distributors. With this fact, not only the decision-making power is increased, but also the purchasing power from other possible suppliers, of which they are now also competitors.
One of the main reasons for a vertical merger is the control of a part that is considered strategic within the production process. For example, it may be advantageous for one or both parties to merge with a supplier or a customer if that part of the production process is considered to be of vital importance to the company, so much so that it is best to control it entirely, and furthermore , make sure that from now on that supplier or client whom we consider good is fully dedicated to us.
Vertical blending shapes
The merger can be forward or backward, depending on the integration with a customer or supplier.
- Forward vertical merger: This is the merger with a collaborating agent in the next phase of the production process and who performs the role of client for the company. This can occur because there is an interest for both to control the next phase or distribution of a product as it is considered strategic and of vital importance.
- Backward vertical fusion: This is the integration between one company and another that performs an earlier phase of the production process, that is, with a supplier. This can be done to ensure the supply of certain raw materials that are important to the company.
Examples of vertical blending
Next, we are going to show an example of vertical fusion for each case. That is, an example for forward fusion and an example for backward fusion.
- Forward Vertical Merge Example: Suppose Company A is a vegetable grower. 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 final packaging and sale of the product. In other words, it is integrated into the next phase of the process.
- Backward vertical merge example: Now suppose company A that sells clothing. You buy the clothes from another company B. Company B is the one that makes the product. In the event that company A acquires company B and starts manufacturing clothing, we would be facing a vertical backward merger. That is, it is integrated into the previous phase of the process.
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