The pros and cons of vertical mergers
Companies try their best to have a chance at better profits and revenues. Hence, they think of ways that can give those benefits. One of the ways that we are talking about includes a vertical merger. Read more to understand how this merger works and how different it is from the usual merger that we know.
Let us define a vertical merger.
Imagine this: two or more companies do not have a similar supply chain of functions. However, they decide to merge for the betterment of a good or service. Most companies look into this type of merger because they want to improve their business or have a more robust supply chain process. Some aim to have more synergy with other companies and industries. Most of the time, companies who engage with vertical mergers get the best out of it.
How does it work?
Vertical mergers do not only decrease the competition since two or more companies become a single entity. These also result in more market shares. The aim is to do better as a single entity than being separate companies.
If a company has trouble in the beginning stages of the supply chain, vertical mergers can help in that department. For example, a supplier can give raw materials to the manufacturer. As we have mentioned, companies in this type of merger do not stand in the same stage of the production process. But they are all needed to come up or produce a good or service.
Is it worth it?
With all the things that we mentioned earlier, it may be reasonable to think that vertical mergers can benefit companies. There will be more revenue, efficiency in operations, lesser production costs, and many more if it becomes successful. Let us list down more possibilities and reasons why we can say that a vertical merger can be worth the try:
- Synergy. A combined entity has more value than being separate and independent.
- Operations. Both the suppliers and producers can benefit from the operational synergy result of this merger.
- Finances. One of the companies in the merger can provide capital or credit if needed.
- Management. Since these companies have their separate teams, they can make those who do not perform well redundant and keep only exceptional and helpful ones to the combined entity. It is hard, but laying off may provide better communication and effectiveness.
Doubts on vertical mergers
We have mentioned that vertical mergers reduce competition, anti-trust violations often enter the picture when we talk about vertical mergers. Why? Because some competitors use this for bad intentions. Some use this as a way for another company to fail. For example, one company can block another from accessing raw materials even when considered a single entity. This will prevent the completion of the product and the disruption of the supply chain. Some people also think this can cause collusion among upstream companies involved in the production's early stages.
In a nutshell
Vertical mergers increase the synergy between two companies.
They also provide more control in the supply chain process for a better
business. However, since there might be reduced market competition, anti-trust
violation citations are always present. But overall, these mergers are supposed
to lower the costs while increasing the productivity and efficiency of the
companies that combined.
