06 Nov Vertical Acquisitions
Last week we discussed horizontal acquisitions, which I also referred to as a merger, since it is involving two companies in a similar stage that combine into one. Although not all mergers are similar companies as was reflected in the merge between K-Mart and Sears, but that is just how I referred to it in the article. This week we will discuss a vertical acquisitions, also know as vertical integration.
Vertical acquisitions are typically when a company buys out one of its suppliers. For example, when if a manufacturing company purchases a product that is partly developed, and then continues to build that product before selling it further, if the manufacturer buys out its supplier that would be a vertical acquisition. This type of strategy is can have a number of benefits, especially when the acquiring company is afraid of its supplier raising prices.
This strategy contains many benefits because it allows continued decreases in the price of production due to the combination of various stages of production into one location, thus allowing a greater utilization of overhead costs and a decrease in transpiration costs. It can also allow information to flow more freely increasing efficiency. One last point I will emphasize, although there are many, is that it cuts the business-to-business costs increasing bottom line profitability for both entities.
When deciding whether to make a horizontal acquisition of a vertical acquisition it is important to consider what types of advantages you would like to pursue. Do you want to decrease your profits and increase efficiency at what you are doing, or do you want to increase the quantity and expand your reach by acquiring new geographic markets. It may be that one strategy is good for your business now and the other is good for your business later. If you have having troubles deciding which strategy is best our M&A consultants are more than ready to assist you in making that difficult decision.