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Mergers are significant business actions that come in two primary forms: the horizontal merger and the vertical merger. Although they entail combinatorial actions that result in two business entities becoming a single one. It is important to note the difference. In the case of a vertical merger, for example, the first business absorbs the second business into one entity only if the second business is within the supply chain of the first. The horizontal merger, on the other hand, absorbs a (now former) competitor. Let’s break down what’s involved in each one a bit more.

Vertical Mergers: The Basics

There’s only one reason why a parent company would try and subsume another company that lies along its supply chain: to increase efficiency. This, in turn, will presumably elevate profits for the parent company. The chief drawback of the vertical merger is the potential antitrust suit that can be levied against it if it can be proven (within the confines of the complex laws involving antitrust) that the acquisition reduced market competition.

As an example of a vertical merger, let’s say a refrigerator company purchases all the antifreeze manufacturers within its local market. This might not directly reduce market competition in and of itself unless the parent company (the refrigerator company) then exerted non-competitive control over the price of antifreeze (which all refrigerators use) to ensure that they made money even when their competitors sold fridges and freezers. This reality limits vertical mergers. Such that any single company cannot effectively buy up all the smaller companies that comprise the supply chain.

Horizontal Mergers and What They Entail

The horizontal merger is also subject to antitrust laws, even though it entails the acquisition of a direct competitor for reasons other than money (usually). This is the one that bumps right up against even the laxest aspects of antitrust law since it is done to reduce competition in the marketplace. For the consumer, mergers can become a big problem during an economic downturn in which companies fail – there are now fewer companies with which to do business.

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