Vertical mergers combine a customer and supplier to capture a market sector. Both companies agree to strengthen their position and expand into new areas. Careful planning is required, and customers must be informed of changes and benefits.
Vertical mergers are business mergers involving the merging of a customer with a supplier. In general, the two companies involved in the merger will produce different but free products. Vertical merger can occur as a means of combining businesses to capture a sector of the market that no one company could handle alone.
In most cases, vertical merging is a voluntary merge. Both sides agree that joining forces will strengthen the two companies’ current position and lay the foundation for expansion into other areas as well. For example, a company that makes bearings for factory machinery may choose to merge with a company that makes gears for the same type of machinery. Together, they continue to deliver products to their existing customer base. At the same time, the newly merged entity will create product offerings that will broaden the usage of existing customers and also enable the merged company to gain additional customers.
The purpose of a vertical merger is to build on the strengths of the two companies and enable future growth. In addition to exploring new ways to use existing product lines to create new products for a broader market, there is also consideration of the assets owned by the merging companies. Often assets such as real estate, buildings, inventories and cash can be rearranged to better position the new company.
A vertical merger usually requires more than just an agreement to join forces. Mergers of this type will require careful planning by both companies. Investors from both entities will be involved in the process, as will both management teams. In general, companies will also want to prepare their customer bases for vertical merger by providing them with information about what is expected to change and what will stay the same. The idea is to assure existing customers that the products and services they rely on will still be available, the level of service will remain high, and that there will be merger benefits that will make life easier for each of the customers.
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