What is Vertical Merger of Companies
If you are planning for a vertical merger, you need to think twice. It pays to make an informed decision. A vertical merger would be ‘the combination of the company or firm with the distributor or supplier’.
The FTC (Federal Trade Commission) is very strict when it comes to vertical mergers because the antirust laws can be violated.
What is Vertical Merger?
Many businesses failed especially during the economic downturn. There are various reasons for such failure and at times, it’s really inevitable. During the course of the business, the owner is required to make very important decisions that can affect the usually flow of the operations. Changes happen every now and then; this is no longer a surprise to entrepreneurs. Have you ever encountered the term vertical merger? Merger is synonymous with the word ‘combine’ so the definition of a vertical merger would be ‘the combination of the company or firm with the distributor or supplier’.
The FTC (Federal Trade Commission) is very strict when it comes to vertical mergers because the antirust laws can be violated. Once the competition of certain companies is hurt, the FTC can conduct an investigation on the antitrust concerns. There are guidelines to follow if companies want to opt for a vertical merger. When a manufacturer forms a partnership with the distributor, this is called vertical merger. The merger can result to advantages enjoyed by both companies. Competitors will find it hard to compete with these merged companies. The distributor will no longer pay for the materials that come from the manufacturer because they are already considered a single entity. This will lead to a reduced cost in the production of their products or goods. If this is the case, the new company will now have a competitive advantage since they can sell their products at a lower price or they can make retain the existing price and make a lot of profits!
The Harm Caused by Vertical Mergers
The FTC will come in when barriers are created that makes it hard for new businesses to enter because of the stringent competition. Vertical mergers that foreclose rivals to have access to the inputs or raise the cost of getting such inputs are hot in the eyes of the commission. Such merger can cause potential harm to the market because the prices of the products can increase or the product quality can be decreased. This is the situation that the FTC is trying to control.
Should your company decide to opt for a vertical merger, you need to be extra careful that you don’t violate any antitrust laws. If you make a decision in haste, the FTC will surely come after you. However, if the merger will not harm the public and the competition, go ahead and you will surely enjoy the benefits that come with mergers. Vertical merger is a sensitive topic so try to have enough knowledge about it.
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