What is a Vertical Merger?

Definition A vertical merger is the combination of two or more companies involved in different stages of the supply chain of a common product or service. A hypothetical example would be if a grocery store that sells milk and cheese, purchased a dairy farm that produces milk and cheese.

What Does Verticle Merger Mean?

What is the definition of verticle merger? Vertical mergers are a strategic way for companies to increase their business and have more control over supporting steps of a supply chain. In a supply chain, a supplier provides raw materials to a manufacturer who creates a product which is then distributed to retailers who sell the product to the end customer. After completing a vertical merger, companies are often able to develop synergies that lead to more efficient operations, reduced costs and increased business.

Vertical integration is a similar concept in which a company expands its operations into other phases of the supply chain. However, this can be achieved internally and does not always require a merger of businesses. The opposite of a vertical merger, is a horizontal merger, in which two companies that create competing products and operate in the same stage of the supply chain, merge their businesses. An example would be the Exxon-Mobil merger in 1998 / 1999.

Example

There have been several examples of vertical mergers. In 2002, Ebay, a prominent online auction and shopping website, acquired PayPal, a company that supports online payments and money transfers. Although both businesses provided different services, PayPal was used for a growing number of transactions on Ebay and therefore very relevant to their operations.

Another recent example of a vertical merger was the acquisition of Ticketmaster by LiveNation in 2010. LiveNation was a prominent owner / operator of over 100 entertainment venues as well as dozens of entertainment promoters, while Ticketmaster was the world leader in ticket sales and also had a related business in talent management. Through this merger, LiveNation was able to capture Ticketmaster’s retail services which directly complement LiveNation’s core businesses.

Summary Definition

Define Verticle Merger: Verticle integration means combining two companies or departments and control two steps in the value chain.