A vertical merger take place when two (or more) firms operating along different parts of the same product or service chain combine to form an enlarged entity. It is not necessary that the firms be in the same geographic area. The term vertical merger can be contrasted with horizontal merger which involves the sideways amalgamation with a rival firm in the same business sector to create a larger business with greater market share and economies of scale and exploit the synergies.
In mergers & acquisitions, vertical mergers tend not to be as common as their horizontal counterpart. This may be because of the specialty skills needed to operate at different parts of the value chain. A buyout that combines these skills may not provide the same benefits and synergistic cost savings as could be achieved when combining with a competitor.
However, this has not stopped firms such as Amazon (AMZN) branching out in a number of directions blurring the distinctions between a horizontal merger and a vertical merger. For example, what started as an online book retailer now offers a full range of products. However, web hosting services are also offered, thus taking control of a large part of its technological infrastructure. Warehousing & distribution services are also supplied as well as the development of media channels via the amazon prime service, and production of own label electronic devices. This would not however qualify the firm as a conglomerate which refers to an organization attempting to control a group of unrelated businesses using superior and efficient management practices.
Additional Vertical Merger Background
Since competition in an industry with many competitors tends to be higher, the goal is to create a larger business with greater control over all aspects of the product. A vertical merger helps increase market share and economies of scale, opportunities that may be unavailable to a stand alone company. These benefits assist with streamlining the delivery of the product from inception to the marketplace. Because of the size and scale of some of these mergers, it is sometime difficult to discern whether the combination is a merger or acquisition. To address this issue we have a separate article entitled The Differences Between Mergers and Acquisitions – Examples & Explanations to assist our readers.
