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You might call the recent acquisition of, an online learning and skills development platform, by Linkedin, the largest professional social network, a horizontal merger. Doing so frequently results in the expansion of current operations instead of the formation of new operations. In a horizontal merger, a company purchases another business within the same industry value chain (either a competitive or complementary business). The aim of a horizontal merger has a more direct path to the bottom line, helping a company to either increase market share or diversify its product offering and therefore its addressable market.
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For example, if a manufacturer uses a component that is provided by either one or few companies, purchasing these suppliers not only ensure continued access to that input, but also undermines the position of competitors. In addition to the aforementioned benefits, businesses might pursue a vertical merger as a means of securing greater control over their inputs. Vertical mergers also help to reduce expenses by ensuring that the means of production and distribution work together harmoniously so there aren’t any surpluses or shortages of the goods being sold. In fact, this is exactly the practice well known luxury bag designer Louis Vuitton employs, and why his popular handbags never go on sale.īy buying the companies different stages of their operations rely on, businesses not only better control the entire chain, but particularly in the case of suppliers, cut down on the time it to takes to find and negotiate with these different parties. In gaining control of the entire supply chain, vertically integrated companies can better control production and price.
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Vertical mergers involve a company buying a supplier, distributor or other part of its supply chain so these various components can be brought under the control of one entity.įor example, a high-end consumer goods brand might acquire the factories responsible for manufacturing their goods, or on the other end of the supply chain, the boutiques or stores that distribute them. The goal of a vertical merger is not directly to increase revenue but rather to improve operational efficiencies and reduce costs, often to the tune of significant competitive advantage.
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Depending on what a business owner is looking to achieve, there are considerations and benefits to both. While different in nature, both vertical and horizontal mergers can have a meaningful and positive impact on a company looking for a more aggressive style of growth. The types of acquisition targets and the integration strategy is what defines such a transaction as either a vertical or horizontal merger. When it comes to mergers and acquisitions (commonly referred to as “inorganic growth”), there are two fundamental types of transactions a business owner might pursue.