Vertical Merger - Explained
What is a Vertical Merger?
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Table of ContentsWhat is a Vertical Merger?How does a Vertical Merger Work? Examples of a Vertical MergerThe Controversy behind the Vertical MergerAcademic Research on Vertical Merger
What is a Vertical Merger?
A vertical merger takes place when at least two companies operating at varied stages in the process of supply chain merge for a specific product or service. Usually, the objective of the merger is to perform effective operations, have more authority and control over the supply chain process, and enhance business. Additionally, it also leads to reduction in costs and makes business activities more productive and efficient.
How does a Vertical Merger Work?
Though people use the terms vertical merger and vertical integration in exchange for each other, vertical integration results in increasing the scope of operations into different stages involved in the supply chain mechanism. It doesnt require two organizations to merge for achieving this objective. For instance, a ladder manufacturing firm can prefer using its own resources for producing aluminium instead of relying on suppliers. On the other hand, vertical mergers involve the merger of the suppliers company and the manufacturing firm. (Note: A horizontal merger works in contrast to the vertical merger. The former considers the merger of two rival firms that manufacture at the same level in the supply chain mechanism.) Such kind of merger results in lesser competition and offers the exclusive sole firm a bigger market share. If the worth of the merged entity turns out to be more than that of an individual firm, it will call for a successful merger.
Examples of a Vertical Merger
We can refer to the following example of a vertical merger: a car manufacturing company buying a tire company. This merger will enable the automaker to save on its tire costs, and will give them the opportunity to enhance their business by supplying their tires to the esteemed automakers in the industry. Such example presents how powerful a vertical merger can prove to be, if implemented properly. In the initial stage, the company gains benefits from the fall in costs, which ultimately result in more profits. Another advantage provided by a vertical merger is the increase in companys revenues. In 1996, a big cable firm called Time Warner Inc. vertically merged with the Turner Corporation that was a huge media organization operating CNN, Cartoon Network, TBS, etc. This was one of the biggest vertical mergers of the 1990s. Another vertical merger took place in 2018 between AT&T and Time Warner. In Feb 2019, the Associated Press reported, "federal appeals court cleared AT&Ts takeover of Time Warner, rejecting the Trump administrations claims that the $81 billion deal will harm consumers and reduce competition in the TV industry.
The Controversy behind the Vertical Merger
Vertical mergers and controversies go side-by-side. When vertical mergers take place, many cases for anti-trust violations are involved due to the possibility of decrease in market rivalry. By using vertical mergers, companies can prevent their competitors from obtaining or procuring specific inventory or accomplishing particular stages in the supply chain process. Lets revisit the instance of the automobile maker buying a tire manufacturing organization. Lets assume that this automobile maker has already bought lots of tire producers in the sector. With this authority, they could have their own control for setting the market supply and price as per their own benefits. This would ultimately reduce the chances of genuine competition among companies. There are many economists who perceive that vertical mergers spread conspiracy among upstream organizations. Key points
- A vertical merger focuses on enhancing synergies, have more authority in the supply chain process, and the growth of business.
- Anti-trust violations can usually be found in vertical mergers due to the possible chances of reducing market competition.
- Vertical mergers lead to reduction in costs, result in smooth production, and improve the efficiency of the organizations.
Academic Research on Vertical Merger
- Systems competition, vertical merger, and foreclosure, Church, J., & Gandal, N. (2000). Systems competition, vertical merger, and foreclosure. Journal of Economics & Management Strategy, 9(1), 25-51.
- Do New Theories of Vertical Foreclosure Provide Sound Guidance for Consent Agreements in Vertical Merger Cases?, Klass, M. W., & Salinger, M. A. (1995). Do New Theories of Vertical Foreclosure Provide Sound Guidance for Consent Agreements in Vertical Merger Cases?. The Antitrust Bulletin, 40(3), 667-698.
- Vertical merger guidelines: interpreting the 1982 reforms, Williamson, O. E. (1995). Vertical merger guidelines: interpreting the 1982 reforms. J. Reprints Antitrust L. & Econ., 25, 83.
- Vertical merger, collusion, and disruptive buyers, Nocke, V., & White, L. (2010). Vertical merger, collusion, and disruptive buyers. International Journal of Industrial Organization, 28(4), 350-354.
- Invigorating vertical merger enforcement, Salop, S. C. (2017). Invigorating vertical merger enforcement. Yale LJ, 127, 1962.
- Anticompetitive vertical merger waves, Hombert, J., Pouyet, J., & Schutz, N. (2019). Anticompetitive vertical merger waves. Concentration-based merger tests and vertical market structure, Gans, J. S. (2007). Concentration-based merger tests and vertical market structure. The Journal of Law and Economics, 50(4), 661-681.
- An economic analysis of vertical merger enforcement policy, Fisher, A. A., & Sciacca, R. (1995). An economic analysis of vertical merger enforcement policy. J. Reprints Antitrust L. & Econ., 25, 129.
- Vertical merger, market foreclosure, and economic welfare, Hamilton, J. L., & Lee, S. B. (1986). Vertical merger, market foreclosure, and economic welfare. Southern economic journal, 948-961.
- An Overview of Legal and Economic Issues and the Relevance of the Vertical Merger Guidelines, Halverson, J. T. (1983). An Overview of Legal and Economic Issues and the Relevance of the Vertical Merger Guidelines. Antitrust LJ, 52, 49.