Vertical merger is a merger in which two businesses in the same supply chain combine together to form one company.
Businesses engage in vertical merger in order to remove inefficiencies in the supply chain. For example, a manufacturer might purchase its distributors and improve profitability by realizing economies of scale in advertising. Another motive for vertical merger is to create a monopoly by integrating with a supplier of key input resource.
There are two types of vertical merger (vertical integration):
- Forward integration
- Backward integration
If General Motors acquires Bridgestone, it would be a vertical merger (vertical integration) because tire manufacturing and automobile manufacturing are part of a single supply chain (of automobiles). The merger is more specifically a backward integration.
Similarly, if General Motors instead acquirers some automobile distributors, it would be a vertical merger (vertical integration), more specifically a forward integration.
Written by Obaidullah Jan, ACA, CFA