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What is a Vertical Merger?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 November 2016
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Vertical mergers are company mergers that involve the union of a customer with a vendor. Generally, the two companies involved in the merger will produce different but complimentary products. The vertical merger may take place as a means of combining assets to capture a sector of the market that neither company could manage on their own.

In most cases, the vertical merger is a union that takes place voluntarily. Both parties determine that joining forces will strengthen the current position of the two businesses, and also lay the foundation for expanding into other areas as well. For example, a company that produces bearings for factory machinery may choose to merge with a company that manufactures gears for the same type of machinery. Together, they continue to provide products to their existing clientele. At the same time, the newly merged entity will create product offerings that will expand the usage of current clients and also allow the new company to capture additional customers.

The purpose of a vertical merger is to build on the strengths of the two companies and allow for future growth. Along with exploring new ways to use existing product lines to create new products for a wider market, there is also the consideration of the assets in the possession of the merging companies. Often, such assets as property, buildings, inventories and cash assets can be reorganized to better position the newly combined company.

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A vertical merger usually requires more than a simple agreement to join forces. Mergers of this type will involve careful planning on the part of both companies. Investors for both entities will be involved in the process, as well as both management teams. Generally, the companies will also want to prepare their respective client bases for the vertical merger by providing them with information about what is anticipated to change and what will remain the same. The idea is to assure existing customers that the products and services they rely upon will still be available, the level of service will remain high, and that there will be benefits to the merger that will make life easier for each of the customers.

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