What is a Vertical Acquisition?
What is a vertical acquisition?
A vertical acquisition is when a company in a certain supply chain acquires another company in the same supply chain but in a different stage of the chain. For example, a retail store acquiring the manufacturer of the clothes it sells would be a vertical acquisition.
What are the benefits of a vertical acquisition?
Vertical integration allows one company to control more parts of a supply chain. This can provide the following benefits:
- prevent supply chain disruptions
- prevent increases in supply chain prices
- allow reduced rates from the integrated company
- increase speed of supplier delivery
- limit supply to competitors
Disadvantages of vertical integration
The acquiring company will face many additional costs during vertical integration. The acquiring company will be responsible for operating an entirely new business with a different business model. If the acquired company provides reduced rates to the acquiring company, the acquired company will need to find a way to make that revenue up in other ways. This is difficult when the acquiring company is not familiar with operating in a different stage of the supply chain.
Another issue in vertical integration is employment. The acquired company may face layoffs immediately, and the remaining staff will need to conform to new management. This often leads to large employee turnover, which is costly and slows down operations.
Finally, the acquiring company should prepare for an antitrust and unfair competition lawsuit. By controlling more of a supply chain, a successful company will inevitably face claims from competitors that the acquisition creates a monopoly. Litigating these issues can be a significant expense.
What is the difference between a vertical acquisition and a horizontal acquisition?
A horizontal acquisition is when two companies merge from the same stage in the supply chain. For example, one manufacturer acquiring another manufacturer. Instead of controlling more of the supply chain, a horizontal acquisition strengthens the acquiring company’s position within the same stage of the supply chain.
About
Attorney Collier started his own law firm straight out of law school and has been practicing law in Ohio for 5+ years. During that time, Joe focused on business law and litigation, gaining some exposure to intellectual property law. While running his firm in 2021, Joe decided to go back to school and get his patent license. Since then, Attorney Collier has been focusing on protecting innovators and entrepreneurs through his expertise in intellectual property and business law.