Merging company

Vertical Merger Definition | Global Currency Online

What is a vertical merger?

A vertical merger is the merger of two or more companies that have completely different supply chain characteristics for a standard good or service. Most often, merging is done to expand synergies, gain additional management of the supply chain journey, and scale up. A vertical merger generally results in lower prices and increased productivity and efficiency.

Key points to remember

  • The goal of a vertical merger between two companies is to intensify synergies, gain additional management of the supply chain journey, and improve the business.
  • Antitrust violations are sometimes cited when vertical mergers are deliberate or occur due to the possibility of reduced market competitors.
  • Vertical mergers could lead to lower prices and increased productivity and efficiency for the companies involved.

What is a vertical merger?

Understanding Vertical Mergers

Vertical mergers help companies manage the early levels of their supply chain, such as a supplier supplying raw products to a producer. The 2 companies involved in a vertical merger each present special services or products but are located at completely different levels of the manufacturing process. Nevertheless, each of the companies is sought for the manufacture of the finished good.

Vertical mergers reduce competitors and can give the newly formed single entity a larger market share. The success of the merger depends on whether or not the joint entity is more valuable than each agency individually.

Advantages of a vertical merger

Vertical mergers are useful because they will help improve operational efficiency, increase revenue and reduce manufacturing costs. Synergies can be created with vertical mergers because the mixed entity is sometimes more valuable than the 2 individual companies.

Operational improvements

Synergies can encompass operational synergies, which can be improvements within the operational strategy of both companies, such as a supplier and a producer. If a producer had difficulty sourcing their merchandise, or if the uncooked supplies needed for manufacturing were expensive, a vertical merger would eliminate the need for delays and lower prices. A car maker buying a tire company is a vertical merger, which can lower the price of tires for the car maker. The merger may also expand its business by allowing the producer to supply tires to competing automakers, thereby increasing its revenue.

Currency synergies

Currency synergies can be realized, which could contain entry to credit or capital by one of many companies. For example, a supplier may need debt on its balance sheet, which reduces access to a borrowing credit facility from a bank. Therefore, the supplier may encounter a shortage of silver in circulation. Again, the producer may have less debt, extra cash, or access to credit, such as a bank. The producer can help the supplier by repaying debt, providing access to cash and a loan facility that the supplier needs to manage more efficiently.

Administrative efficiency

Improvements may include consolidating or reducing the chief administrative staff of joint ventures. By eliminating underperforming managers and changing them, the company can improve communication and the overall effectiveness of the mixed entity.

Vertical Merger vs Vertical Integration

Although the terms vertical merger and vertical integration are sometimes used interchangeably, they don’t sound exactly the same. Vertical integration – the growth of operations at different levels of the distribution chain – can occur without merging two companies. For example, with vertical integration, a ladder manufacturing company may decide to supply its own aluminum for the best product instead of buying it from suppliers. A vertical merger, again, would eventually result in the merger of the manufacturing company and the supplier.

The other of a vertical merger is a horizontal merger, which includes the merger of two competing companies that are producing at the same stage as part of the supply chain.

The controversy over vertical mergers

Vertical mergers are not without controversy. Antitrust violations are sometimes cited when vertical mergers are deliberate or occur due to the possibility of reduced market competitors. Vertical fusions can be used to prevent opponents from accessing uncooked supplies or completing certain tiers throughout the supply chain.

Consider the first case where the automaker buys a tire manufacturer. Suppose this similar car manufacturer buys a large number of commercial tire manufacturers. He can then manage supply in the market in addition to value, thus destroying honest or “excellent” competitors. In addition, some economists consider that vertical mergers can promote collusion between upstream firms, ie firms involved in the first levels of manufacturing.

Real World Instance of a Vertical Merger

A notable vertical merger was the 1996 merger of Time Warner Inc., a serious cable company, and Turner Company, a serious media company responsible for CNN, TNT, Cartoon Community and TBS. In 2018, a merger between Time Warner and AT&T(T) was finalized but not without careful consideration.

In February 2019, as Related Press reported, the “federal appeals room cleared AT&T’s takeover of Time Warner, rejecting claims by the Trump administration that the $81 billion deal will hurt buyers. and reduce competitors in the TV business”.

In accordance with the monetary details of the acquisition, the mixed entity will notice high monetary synergies of $2.5 billion. Value synergies of $1.5 billion and revenue synergies of $1 billion are expected within three years of the closing of the agreement.