Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

July 16, 2019

Understanding Vertical Mergers

By Achim Neumann

What are Vertical Mergers?

In every consumer-based industry, a supply chain of companies exists to fulfill different roles. Each one of the companies in the chain provides a service that the other needs in order to bring a product closer to the customer. Sometimes, two or more companies that exist in different points of the supply chain may come together for the purpose of increasing synergies, reducing costs and improving productivity and efficiency. When this merging of companies occurs, it is referred to as a Vertical Merger.

Vertical Integration and Horizontal Mergers

The terms “vertical merger” and “vertical integration” are interchanged regularly in the business world. But it is necessary to make a distinction. Vertical Integration occurs when a business expands its presence and operations to other points of the supply chain. For instance, a piano making company could also decide to make the piano stands instead of purchasing from their suppliers. This would not require a merger with another company and is not the same as a vertical merger. A vertical merger would happen if the piano maker and the piano stand maker were to come together.

On the other end of the merger spectrum, a horizontal merger occurs when two companies who compete against each other in the same point of the supply chain and produce the same thing find that they would have more value together than against each other and so decide to join forces. The result of this type of merger is often an exponentially larger share of the market for the new entity and less threat from competition.

Some Examples of Vertical Mergers

One example of a vertical merger is that of the piano and the piano stand makers. Another example is of a local bakery buying the flour factory. A vertical merger of this nature would drastically reduce the cost of buying flour for the bakery, and give it the chance to expand business by supplying flour to other local and regional bakeries.

This expanse in business and revenue streams inevitably leads to a bigger bottom line. An example of a profitable vertical merger is that of Disney, the once humble cartoon maker. After decades of growth in the animated movie field, Disney acquired independent film distributor Miramax Films in 1993. They expanded their activity into the distribution arm of the entertainment industry and in 1997, they were able to enter a 10-year distribution partnership with Pixar Animation Studios. The partnership brought forth many global best-sellers like Toy Story, The Incredibles, and Coco.

These benefits of reduced costs and increased revenues show how vertical mergers can offer multiple benefits to the company conducting the merger.

The Downsides of Vertical Mergers

Vertical Mergers definitely have benefits, but they are not without their risks. When vertical mergers occur within an industry, the sheer increase in power gives the possibility of reduced market competition and the chance that the larger entity could breach anti-trust laws. Some merged companies have been known to use their advantage to stop competition from getting materials they need to conduct business so as to push them out of the market.

Take again, for instance, the example of the bakery that acquires the flour factory. While the merger would give the baker reduced costs in flour purchase, the baker can also increase the price of flour for other local bakers, making it difficult for them to compete. They could also sell bread at whatever price they wanted, and customers would have to purchase because they would have little or no competition. This risk of creating a monopoly is why vertical mergers are often scrutinized before being carried out.

Bottom Line

Vertical Mergers are beneficial to companies within a supply chain. It allows them to reduce their costs, increase their revenue, and improve sustainability.

However, they come with the risk of creating monopolies which is not the desired outcome.

If you like to learn more about Mergers and Acquisitions, reach out to us here at A. Neumann & Associates, LLC and speak to one of our M&A specialists.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

Comments are closed.

Any questions? Please contact us at 732-872-6777
Call Now

Client Testimonials

“I'm an attorney. I have represented the buyers and sellers of businesses for 20+ years. Recently I had the pleasure of handling a transaction where Richard Wilder of A. Neumann & Associates was the broker for the seller. Mr. Wilder was of great service to his client. He is very knowledgeable and organized. Thanks to his guidance the transaction proceeded smoothly and closed on time. He is highly recommended.”

Nick Ferrante

“Richard, you came to my office a few years ago and were wonderful in explaining your process and procedures. Our company is probably an anomaly in that we sold the majority to two long time employees and I financed them both. Our company is entering its 45th year and is still thriving. The purpose of the note is to thank you very much for the service that you provide. Thank you again.”

John Foug, Seller

“We had a great experience working with Richard Wilder from Neumann and Associates as the sell-side broker for Blade Runners. He was knowledgeable, professional, and clearly had his client’s best interests at heart. Richard helped keep the process smooth for everyone, and thanks in part to his efforts, we found a fantastic owner to partner with. We'd gladly work with Richard and the Neumann and Associates team again.”

Justin Martin

“Very happy with Richard and the entire process. I was on the buyer side of the transaction.”

Isaac Palmer, Jr.

“If you are looking for a professional and informative company that meets your needs, A Neumann & Associates is the company to go with. Ted Kantor went above and beyond to make our experience as easy as possible. Ted was helpful from the start of our process to the end. He was there every step of the way to guide us and answer all of our questions. He handled all of the in-depth communication and followed up on every detail. We strongly recommend Ted Kantor to help you whether you're buying or selling. It was a great experience. We never imagined it would go as smooth as it did. The Laluna's (Andy, Maria & Tony Jr)”

Maria Laluna

“A Pleasure to work with - I highly recommend them! Working with Richard Wilder was a pleasure, and he found us the perfect match.”

Laura Keith-Macario

“This spring we acquired a business that was represented by Richard Wilder at A Neumann & Associates. Small business acquisitions can be very emotional for the sellers and life-changing for the buyers, and Richard was keenly aware of this throughout the process. Although he was working for the sellers and not for us, he knew that most business owners see their business as their baby so the only way to have a happy outcome for his clients was to also have a happy outcome for the buyers. Knowing how nerve-wracking this process can be (think home buying x 10), he never dropped the ball on keeping everyone updated, anticipating potential snags, and guiding us along in the process. We highly recommend Richard.”

Shannon, Buyer

“My business was my baby for over 40 years. It is a tough and cruel world out there when it comes to selling your business. Neuman and Associates provided the professional guidance/protection to get the job done with care and no pressure. In my view a tremendous value. I would recommend them to anyone seeking to sell their business. Eric Storck, president of Blade Runners Inc.”

Eric Storck, President - Blade Runners Inc.

“I’m really impressed with how your firm operates. The focus on confidentiality, the thorough vetting process, and the use of third-party accredited valuations really stand out. It’s easy to see why you’ve built such a strong reputation over the years.”

Ann M., Investor

“Thanks for sending over such a detailed CIM.  While I have only reviewed a have dozen CIMs at this point, your company has put together the most comprehensive data and detailed presentation I have seen so far.”

Ben N., Investor
view all testimonials

Contact A Neumann & Associates, LLC

If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

call us now
Contact Us for a Free, Confidential Consultation

Experienced M&A Advisors available

Full Name
Email Address
Phone Number
Message