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What Is a Vertical Merger: Everything You Should Know
Mergers and acquisitions are both massive changes that organizations go through in order to expand and succeed in their ...
Mergers and acquisitions are both massive changes that organizations go through in order to expand and succeed in their industry. A merger is a strategic move that can strengthen the efficiency, market share, and profitability of a company. It can take many forms, but vertical mergers are particularly well-known for shaping the competitive landscape of industries and stimulating economic growth. What is a vertical merger, and how does it work? These mergers consolidate resources and create synergy, thereby playing a pivotal role in corporate strategic planning.
Table of Contents
- What Is a Vertical Merger?
- What Are the Advantages of Vertical Mergers?
- What Are the Challenges and Risks of Vertical Mergers?
- What Data Migration Process Does a Vertical Merger Entail?
- What Is a Vertical Merger Like With Cloudficient?
What Is a Vertical Merger?
A vertical merger represents a unique union between firms operating at different stages of the production supply chain. For instance, a supermarket can merge with a local organic farm and become SuperOrganic. The farm could then provide the produce, dairy, and meat the supermarket sells.
A vertical merger creates a more efficient and cost-effective operation. By owning more stages of the supply chain, the merged company can control every stage of the process and boost efficiency.
In the case of the supermarket merging with a farm, the former gains direct control over quality, availability, and cost. Because the supermarket does not pay a markup for the farm’s goods, it can also charge lower prices.
A major vertical merger example is the case of Google purchasing Android in 2005. It started as an acquisition, but Android has become virtually synonymous with Google. The purchase of Android also allowed Google to expand into the hardware market. It did this by licensing Android to other manufacturers and later making its own products, such as the Pixel phones.
What Are the Advantages of Vertical Mergers?
Vertical mergers can propel a business to new heights of success. How exactly does it achieve this?
Improved Supply Chain Efficiency and Coordination
Vertical mergers do an excellent job of boosting supply chain efficiency. Integrating different stages of production under one roof has the following effects:
- Eliminates the need for contractual agreements with suppliers and distributors
- Reduces transit times
- Minimizes associated costs
This streamlining of processes allows for a smoother flow of goods within the supply chain, leading to improved productivity and profitability. Smooth coordination reduces wasted resources and ensures that the company's operations are more responsive to changes in the marketplace.
Access to New Distribution Channels
Vertical mergers help businesses expand into new distribution channels, which can significantly impact business growth. New channels make it easier for the newly created company to enter new markets and obtain new customers. For example, merging with an organic farm could help SuperOrganic reach more health-conscious people.
Companies sometimes gain significant control over when and where their products end up. In the example case, the organic farm’s produce will almost exclusively end up at the supermarket. Even if it sells some to competing stores, that's at the farm-to-supermarket markup price, which makes it harder for them to outsell the owning company.
Increased Control Over the Production Process
Vertical mergers introduce unparalleled levels of control. When companies work separately, they have to trust the other entity’s processes and respect them. For example, the organic farm might dislike the idea of the supermarket packaging items for sale in one-use plastic bags. It could advocate for biodegradable alternatives or even paper. However, before the merger, convincing the supermarket to change how it packages items would be challenging.
Vertical mergers can also minimize the risk of supply disruptions. For example, say an invasive species devastates strawberry crops in the area. All farms are affected, which raises the prices. However, the organic farm could ensure a steady supply of strawberries because it only caters to one supermarket.
Leverage of Trade Secrets
Leveraging trade secrets through a vertical merger can increase innovation. New ideas and practices from one company can inspire the other to think creatively and experiment with different strategies or techniques.
Even if only one company has a trade secret, it can leverage that secret down the line. For example, imagine an agriculture science company named Miller’s Labs has mastered a process for eliminating the strawberry-eating invasive species. The company has large testing centers and stores confidential data related to its findings. Eager to test its processes on a larger scale, it merges with SuperOrganic and becomes Miller’s SuperOrganic.
The farm branch of this merger can recover quickly from the pests and produce a surplus of strawberries. The supermarket benefits because it continues to be the only supermarket with a guaranteed steady supply and lower prices.
What Are the Challenges and Risks of Vertical Mergers?
While vertical mergers can lead to growth and efficiency, they have some drawbacks. Identifying these early can help you create effective contingency plans.
Potential Antitrust and Competition Concerns
All mergers and acquisitions risk attracting negative attention from the Federal Trade Commission. If the merger decreases competition and consumer options, the FTC might intervene to avoid the risk of a monopoly.
Tech is one area where vertical mergers can pose a threat. For example, Google has a near-monopoly in several areas due to what the DOJ has called “serial acquisitions.” The tech company absorbed several smaller products and companies to create a large ecosystem.
Its digital ad space is one example of this. The Justice Department has ruled that this level of market leadership is anti-competitive and amounts to subversion.
Reduced Competition in Related Markets
When companies merge and hoard resources, it is difficult for others to compete. In that case, other market companies may need help securing raw materials or be forced to pay higher prices. This scenario can stifle competition, leading to a less dynamic and potentially less innovative marketplace.
Google’s alleged internet advertising monopoly exemplifies this. Few companies have the resources to compete against it. Microsoft and Meta are also large tech companies, but even their advertising platforms pale in comparison to Google’s hold on the market.
A hypothetical example is the case of the strawberry pests. Suppose Miller’s SuperOrganic never shares its secret and chooses not to sell its surplus to other supermarkets. Instead, it hoards the strawberries and sells them at inflated prices. This would inevitably draw the attention of the FTC.
Difficulty Integrating Different Operations and Cultures
Merging companies at different stages of the production line can introduce unique challenges. Operations and company culture are often vastly different. For example, the lab portion of Miller’s SuperOrganic has thousands of highly educated workers in science and tech to run the labs and keep their findings secret. On the other hand, the organic farm has a primarily blue-collar staff.
This can lead to vastly different ways of working and communicating. Good managers find one common vein that runs through all three branches. In the case of Millers SuperOrganic, that could mean the desire to give customers affordable and healthy choices.
Failure to find a common thread or goal could lead to conflict. If managers do not resolve differences, they can undermine the merger's potential benefits by worsening into:
- Unhealthy internal competition
- Inefficiencies post-merger
Successfully integrating operations requires careful planning, open communication, and time. It involves harmonizing different operational processes and aligning strategic objectives. Managers must set realistic goals for cultivating a shared corporate culture.
Even with diligent planning and execution, the integration process can be time-consuming and lead to temporary disruptions in productivity. Companies considering vertical mergers must consider the potential challenges and develop effective solutions.
What Data Migration Process Does a Vertical Merger Entail?
The vertical merger data migration process is complex because it consolidates two systems created for different purposes. In our running example, the supermarket has a system for tracking inventory and payments, while the organic farm tracked inventory in a spreadsheet and kept physical files for workers and taxes. Meanwhile, the lab has large data centers for storing confidential records. Consolidating all three IT infrastructures can take time.
It also requires a strategic design to determine what solution best suits the new company’s needs. For example, the supermarket and the organic farm might leverage the lab’s cloud infrastructure. Then the supermarket can expand its warehouse by giving up its small server room. Similarly, the organic farm could gain extra space for storing animal food by digitizing its written files. The lab might also choose a hybrid system, which allows it to keep its most sensitive data in-house and off the cloud.
What Is a Vertical Merger Like With Cloudficient?
When our cloud migration team undertakes data migration in a vertical merger, we start with meticulous planning, careful execution, and robust data governance strategies. Understanding what is a vertical merger is just the beginning. We use modern data integration tools to streamline the process and ensure minimal or no service disruption. Contact us today to learn how we can help streamline your vertical merger process.
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