Vertical acquisition involves acquisition of one company by another in which both the companies operate in the same industry, however occupying different positions in the industry’s supply chain.
Vertical merger often results in synergies derived by improving the efficiency and lowering the cost volatility. Vertical integration could be either forward or backward integration. In case of backward integration, the company aims to secure regular supply of raw materials and other supplies, minimizing the cost volatility. In case of forward integration, the company tries to gain competitive advantage by controlling the distribution channels.
Vertical integration is different from horizontal integration in the sense that in case of horizontal integration the company is trying to increase its product portfolio or the bargaining power.
Example of a backward vertical integration includes the acquisition of Trilix Srl, an Italian car designing and engineering firm by Tata Motors to enhance the latter’s styling and design capabilities to global standards.
Example of a forward vertical integration includes IBM acquiring an independent software vendor (ISV) Bigfix which used to sell IBM products to niche markets.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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