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What is a Vertical Acquisition?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 September 2016
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    Conjecture Corporation
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Vertical acquisitions are buyouts that involve two companies that are considered to be part of the same industry. However, the acquiring corporation usually focuses on a different aspect of the production process within that industry than the company that is acquired. The end result of a vertical acquisition is a larger unified corporation that has a stronger presence within that industry.

The key to understanding the concept of a vertical acquisition is to look upon the process as a means of one company seeking to purchase another company that manufactures products that will enhance the goods provided by the parent.. For example, the acquiring company may be involved in the manufacture of gears. In order to maximize their market share and perhaps also cut production costs, they may choose to acquire a company that manufactures bearings. To that end, the gear company will approach the bearing company with an offer to buy. If terms can be worked out to the mutual agreement of all parties concerned, the acquisition takes place and the parent company now covers a broader range of products with the industry.

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While many of the acquisitions of this type are considered friendly, there are examples of the vertical acquisition that may be considered hostile. In the event that a company does not wish to sell, the acquiring company may begin to buy a controlling interest with the corporation and slowly gain control until there is enough support for a acquisition to take place. Often, this process is much more costly than a straight buy-out, and only occurs when the desire to acquire the company under any circumstances is very strong.

A vertical acquisition can be a positive experience for both the acquired company and the acquiring entity. Often, all facilities that were in operation before the vertical acquisition continue to operate. The combined resources of the companies may also make it possible to expand those operations. At the same time, the combined strength of marketing and sales strategies may result in a stronger presence in the industry that goes beyond the simple unification of assets and current production levels.

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