Vertical merger is the term used in the context of merger and acquisitions, it refers to a merger between two companies which though are operating in the same industry but does not sell the same product rather they do business with each other. In simple words it is a merger between two companies which have a buyer and seller relationship. Given below are the advantages and disadvantages of vertical merger –
Advantages of Vertical Merger
- The biggest advantage of vertical merger is that it reduces the company’s dependence on the supplier of raw material because in vertical merger company is buying the suppliers business and therefore company has complete control over the supply of raw material and there is no stress of supplier demanding higher price or late delivery of raw material or any other illegitimate suppliers demand.
- It also leads to economics of scale for the company as it reduces the various costs associated with procurement of raw material like transport cost, transactions cost, labor and so on.
- It helps the company in research and development of product because after vertical merger company has people with knowledge of both raw material and finished product which helps the company in producing the better product than before at very lower cost leading to higher profits for the company.
Disadvantages of Vertical Merger
- The biggest disadvantage of vertical merger is that it forces small suppliers to go out of business because once the company start acquiring big suppliers than small suppliers loses pricing power and eventually they go out of business.
- Another disadvantage of vertical merger is that the whole idea of this type of merger is to take control of supplies of raw material and if there are large number of suppliers and if competitor companies are able to acquire raw material at cheaper rate from other suppliers than company will loss competitiveness in terms of cost to other companies.
- It results in locking of capital of the company which could have been used for some other profitable projects and hence company should take into account opportunity cost of capital also before going for vertical merger.
As one can see from the above that vertical merger has both advantages and disadvantages and therefore company thinking of doing vertical merger should keep the above points in mind before taking any decision regarding this type of merger.