Question

Why do firms go for vertical mergers and acquisitions? Are more such integrations better than less? Comment on their importance in the future.

Answer 1

The importance of vertical mergers are :

1.Independence From Suppliers

One of the principle advantages of vertical integration (whether forward or backward) no longer being dependent on suppliers -- and the costs and unpredictability that may come with them. This helps the company or firm increase efficiency by streamlining the process of obtaining supplies for its product, manufacturing it and selling it. In this manner, companies that vertically integrate often are more time efficient -- with shorter turnaround times.

2. Cost Control

With vertical integration, the ability for manufacturers or retailers to control prices is a huge asset to conglomerates, who would ordinarily have to set some prices to match up with their supply chain. But when companies vertically integrate, they are able to control costs more closely, and often are able to offer lower prices (which translates to increased consumer demand and therefore an increased bottom line).

3. Creates Economies of Scale

One of the biggest benefits of vertical integration is that it helps companies create economies of scale.

4. Increased Product Knowledge and Marketability

Although perhaps one of the less-obvious advantages to vertical integration, being able to understand the market for a product and create their own version (a knock-off, so to speak) is a huge benefit that typically only large companies can enjoy. When a manufacturer is partnered with a retail company along the supply chain, they are able to produce look-alike products (with similar processes or aspects as competitor's products) to those of competitors and distribute them through their retail channels -- and, due to the usual size and grandeur of vertically integrated companies, competitors are often unable or hesitant to sue for copyright infringement.

5. Increased Market Control

Another major asset of vertical integration (and arguably one of the most important) is the increased market control a company assumes when vertically integrating.

Answer 2

Vertical Merger

A vertical merger is the merger of two or more companies that provide different supply chain functions for a common good or service. Most often, the merger is effected to increase synergies, gain more control of the supply chain process, and ramp up business. A vertical merger often results in reduced costs and increased productivity and efficiency.

A vertical merger is the merger of a company and its supplier. When companies produce different services and products along a value chain and their merger takes place, it is referred to as a vertical merger. Companies carry out a vertical merger for synergy gains. It helps in improving operating efficiency and thus reduces costs.

A vertical merger is a part of corporate strategy. While going for a vertical merger, companies should carry out proper due diligence regarding its pros and cons. It should properly consider the synergy gain due to the merger. Besides bringing inefficiencies, it helps in increasing market share, lowering costs, facing the competition and bringing in other economic benefits.

However, certain vertical mergers come under legal scrutiny as the entity ends up controlling raw materials. Similarly, it may end up killing competition. The success of the merger depends upon the intent of the company. A vertical merger must be carried out if the advantages of the merger outweigh the costs. Even after carrying out the merger, more challenges come into the picture. The culture of the entity being merged has to adapt to the culture of the merged entity. The merger would definitely end up in success if it is approached in a positive way

Vertical mergers help businesses control the earlier stages of their supply chain, such as a supplier that provides raw materials to a manufacturer. The two companies involved in a vertical merger each provide a different product or service but are at different stages of the production process. However, both companies are needed for the production of the finished good.

Vertical mergers reduce competition and can provide the new single entity with a larger share of the market. The success of the merger is based on whether the combined entity has more value than each firm separately.

Benefits of a Vertical Merger

Vertical mergers are helpful because they can help improve operational efficiency, increase revenue, and reduce production costs. Synergies can be created with vertical mergers since the combined entity typically has a higher value than the two individual companies

1. Operational Improvements

The synergies can include operational synergies, which can be improvements in the operational process of the two companies, such as a supplier and a producer. If a producer had difficulty obtaining supplies for its products, or if the raw materials needed for production were expensive, a vertical merger would eliminate the need for delays and reduce costs. A car manufacturer that purchases a tire company is a vertical merger, which could reduce the cost of tires for the automaker. The merger could also expand its business by allowing the manufacturer to supply tires to competing automakers–thus boosting revenue.

2. Financial Synergies

Financial synergies can be realized, which might involve access to credit or capital by one of the companies. For example, a supplier might have debt on its balance sheet leading to reduced access to a borrowing credit facility from a bank. As a result, the supplier might experience a shortage of cash flow. On the other hand, the producer could have less debt, more cash, or access to credit, such as a bank. The producer could help the supplier by paying down debt, providing access to cash, and a borrowing facility that the supplier needs to run more efficiently.

3. Management Efficiencies

Improvements could include a consolidation or reduction of the executive management team of the combined companies. By eliminating the poorly-performing managers and replacing them, the company can improve the communication and overall effectiveness of the combined entity.

4. Lower Cost

After a corporation merges with one of its suppliers, it no longer has to pay the supplier for the material, as they are essentially now one entity. Previously, the distributor would have had to pay the supplier the cost of the material in addition to the mark-up cost charged by the supplier to make a profit. After the merger, the parent corporation can obtain materials at cost.

5. Supply Chain Stability

Once suppliers are absorbed into a parent corporation, that corporation has increased stability in terms of supply. Whereas before the company would have had to worry about negotiating the lowest cost and choosing between various competitors, the post-merger company has essentially one less thing to worry about. If these vertical mergers extend into various areas of supply, the corporation is more stable as the supply chain is internalized.

Vertical Merger vs. Vertical Integration

Although the terms vertical merger and vertical integration are often used interchangeably, they are not exactly the same. Vertical integration—the expansion of operations into other stages of the supply chain process—can occur without merging two businesses. For example, with vertical integration, a ladder manufacturing company could decide to produce its own aluminum for the end product instead of purchasing it from suppliers. A vertical merger, on the other hand, would result in the manufacturing company and the supplier merging.

The Vertical Merger Controversy

Vertical mergers are not without controversy. Anti-trust violations are often cited when vertical mergers are planned or occur because of the probability of reduced market competition. Vertical mergers could be used to block competitors from accessing raw materials or completing certain stages within the supply chain.

Consider the earlier example of the car manufacturer purchasing a tire manufacturer. Suppose this same car manufacturer purchased most of the tire manufacturers in the industry. It then could control the supply to the market as well as the price, thus destroying fair, or "perfect" competition. Moreover, some economists believe that vertical mergers can promote collusion among upstream firms, which are companies involved in the early stages of production.

Disadvantage: Force Suppliers Out of Business

As far as market competition goes, vertical mergers can have a negative effect. Depending on the size of the corporation in question, a vertical merger can rob the suppliers market of significant business, potentially putting smaller suppliers out of business.it may create monopoly if the two firms merging accounts for the large market share already.

Disadvantage: Anti-Trust Issues

Vertical mergers essentially reduce competition in the market and, depending on the size of the companies involved and their place in the market, can lead to monopolistic practices. For this reason, the governments of many developed nations have laws prohibiting vertical mergers if they contribute to monopolistic domination of the market by a single corporation. One instance of this was in the merger of Time Warner and the Turner Corporation. The Federal Trade Commission was concerned that this would allow Time Warner to control a very large chunk of television programming. The merger, though scrutinized, was ultimately allowed to go through.

Even though vericle merging strategy make its service and distribution networks more efficient, and absorb profits that would have otherwise gone to parts suppliers and other entities. The company by assuming control of its supply and distribution networks, raise entry barriers for other companies while developing its own core competencies.

The Drawbacks of Vertical Mergers

Though vertical acquisitions are advantageous in most cases, there are some pitfalls to consider.

• The quality of the goods (those once supplied by outsiders) may diminish due to scarcer competition.
• The ability to decrease or increase raw material and component production might be lost as a company may have to sustain a certain production level in pursuit of an economy of scale.
• It may be hard for a company to sustain its core competencies as it shifts its focus to the integration of its new units.

with market point of view verticle mergers are more profitable more cost-effective way, but with a cunsumer , or competitor point of view it will affect the market, and also product quality and creates entry barriers for new firms.  

Answer 3

Vertical merger means acquiring the business of supplier or customers of the business to unlock the benefits. These mergers and acquisitions are generally done with a viewpoint of ensuring the supply of crucial raw materials for the firm's production, which are either unique or having shortage of supply, or the profit margin charged earlier was too high, so that the firm sees it beneficial to control the supply. Sometimes, firms sees the distribution channel is either inefficient or is making too high margin, and thus making it a potential target for acquisition.

These merger should not be a regular feature but rather done stratergically, so the maximum potential is unlocked. So there is no such case that more vertical merger are better than less.

The importance of vertical merger is going to increase in future as the firms would try to capture not only a segment of supply chain but teh whole market. For that they need vertical integration, especially in uncertain times after the current panedemic over.