Vertical merger definition
/What is a Vertical Merger?
A vertical merger is an acquisition by an organization of a supplier or customer. Buying a supplier is called backward integration, while buying a customer is called forward integration. In effect, a vertical merger combines the operations in two stages of the value chain within an industry.
Advantages of a Vertical Merger
There are several reasons for completing a vertical merger. First, a business might want to secure a source of raw materials, which is of particular importance when there is or is projected to be a shortfall in certain supplies. A second reason is so that a supplier can have an assured customer for its goods and services; while it may have many customers, locking down sales to one or two large customers ensures a portion of its sales backlog. Third, a business might want to eliminate a distributor that sits between it and its end customers. This acquisition gives it direct access to these customers. A fourth reason is that a vertical merger prevents competitors from using the acquired businesses, forcing them to deal with other parties that might be substandard. And finally, a vertical merger allows a business to strip profits out of the supply chain that were going to someone else.
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Examples of Vertical Mergers
An example of a vertical merger is a car company that acquires a car seat manufacturer in order to secure a reliable source of supplies. Another example is when a gas pipeline company buys a gas exploration company in order to secure a source of gas for its pipeline. Yet another example is when a shoe manufacturer buys a retail shoe chain in order to have more direct access to customers.