What is a Vertical Merger?
A vertical merger (also called vertical integration) is a merger between a manufacturer and a supplier. This is different from a horizontal merger between two companies that manufacture similar products.
How Vertical Mergers Work
A vertical merger is a merger between two companies that produce separate services or components along the value chain for some final product. Mergers between such companies occur in an effort to reduce production costs and increase efficiency for higher profits.
To illustrate, suppose company XYZ produces shoes. Company ABC produces leather. ABC has been XYZ's leather supplier for many years, and they realize that by entering into a merger together, they could cut costs and increase profits. They merge vertically because the leather produced by ABC is used in XYZ's shoes.
Why Vertical Mergers Matter
Vertical mergers allow manufacturers to control the entire production cycle by purchasing suppliers and bringing them on as part of the company. This way, manufactures can have control over the cost and production of individual components, resulting in lower cost and greater output efficiency.