Controlling The Supply Chain
When there are two companies that are at different level of the process of the supply chain but the goods or services supplied are same, when such companies are merged it is known as a vertical merger. A vertical merger can happen between two or multiple such companies. The aim of a vertical merger is to grow the synergies, gaining more authority over the supply chain tasks as well as growing the business. In addition to this, there is cost reduction and growth in productivity and there is an increase in efficiency as well.
Sometimes vertical integration is also used instead of a vertical merger. But sometimes the functions of supply chain process might be expanded without the necessity of vertical merger of two companies in which case vertical integration is used. We can consider an example where a company that manufactures ladder will require aluminum to do so, but instead of buying the aluminum from other sources where this is supplied, the company decides to make aluminum on their own. On the other hand, when there is a vertical merger it will result in the company that manufactures ladder and the supplier who sells aluminum getting merged. Conversely, there is a horizontal merger that is completely opposite to vertical merger where there is a merger of two companies that are competing but are at the same level in the supply chain process.
Some more examples of vertical merger
A company that manufactures cars will buy a company that manufactures tires, this is an example of a vertical merger. What will happen after the merger is that there will be a reduction in the price of the tires for their automobile production? Further, there will be a potential expansion of the business as they will able sell tires to the other automobile companies that will require the tires. In this example, we can see that how a vertical merger will be two times more beneficial to the firm in comparison to the company that will undergo vertical integration.
In the initial stage, the company will benefit from the reduced prices and this will result in growth in the profits gained. Another benefit will have is that there is an increase in the bottom line since the flow of revenue will be expanded. The very first vertical merger that was noted was in the year 1996 when Time Warner Inc. that was a big cable company was merged with the Turner Corporation which was a big media company.