Vertical mergers involve the union of a customer with a supplier, combining assets to capture a sector of the market. They are voluntary and aim to build on the strengths of both companies for future growth, often involving careful planning and communication with customers.
Vertical mergers are mergers of companies that involve the union of a customer with a supplier. Generally, the two companies involved in the merger will produce different but complementary products. Vertical mergers can occur as a means of combining assets to capture a sector of the market that no single company could manage on its own.
In most cases, a vertical merger is a voluntary merger. Both parties determine that joining forces will strengthen the current position of the two businesses and also lay the groundwork for expansion into other areas. For example, a company that produces bearings for factory machinery may choose to merge with a company that manufactures gears for the same type of machine. Together they continue to provide products to their existing clientele. At the same time, the newly incorporated entity will create product offerings that will expand current customer usage and also allow the new company to capture additional customers.
The purpose of a vertical merger is to build on the strengths of both companies and allow for future growth. In addition to exploring new ways to use existing product lines to create new products for a wider market, there is also consideration of the assets owned by the merged companies. Often, assets such as property, buildings, inventory and cash assets can be reorganized to better position the newly combined company.
A vertical merger often requires more than a simple agreement to join forces. Mergers of this type will involve careful planning by both companies. Investors from both entities will be involved in the process, as will the two management teams. Companies also often want to prepare their respective customer bases for vertical merger by providing them with information about what is expected to change and what will remain the same. The idea is to reassure 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 benefits from the merger that will make life easier for each and every customer.
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