Vertical merger

A vertical merger is an acquisition by an organization of a supplier or customer. Buying a supplier is called backward integration, while buying a customer is called forward integration. In effect, a vertical merger combines the operations in two stages of the value chain within an industry. There are several reasons for doing so, including the following:

  • Securing a source of raw materials
  • Having an assured customer
  • Eliminating distributors in order to get closer to the end customer
  • Creating efficiencies by combining operations
  • Preventing competitors from using the acquired businesses
  • Stripping profits out of the supply chain that were going to someone else

Examples of vertical mergers are:

  • A car company acquires a car seat manufacturer in order to secure a reliable source of supplies
  • A gas pipeline company buys a gas exploration company in order to secure a source of gas for its pipeline
  • A shoe manufacturer buys a retail shoe chain in order to have more direct access to customers

Related Courses

Business Combinations and Consolidations 
Mergers and Acquisitions