Vertical Mergers are an Effective Strategy for Growing Your Business
How to grow your business quickly, and at low cost? Through a vertical merger or acquisition. When a business merges or acquires another business in its vertical supply chain, it is growing through vertical merger or vertical acquisition. Examples of this type of merger are: a radio station that merges with an advertising agency; a dairy farmer who merges with a dairy products plant; a winery that acquires or mergers with a specialty wine store; and more. These merger acquisitions examples demonstrate the relationship between businesses in a supply chain.
Mergers and acquisitions are different. An acquisition is often considered an offensive action; it is a take-over of another company and often that take-over can be hostile. A merger is usually considered a friendlier, defensive maneuver, with both companies agreeing to merge. There is a difference between mergers and acquisitions. A merger is often viewed as a more 'friendly' action; a decision amongst both parties to merge together. Mergers and acquisitions accelerate growth, they can be useful if you want to improve your market position (or protect it), and they can help you achieve your strategic objectives for your business in a relatively economical manner. There will always be some challenges in either a merger or acquisition; the most significant challenge is managing the change of blending or acquiring two organizations while still realizing the benefits.
The challenges of merging or acquiring two businesses are significant. You need to ensure that the culture of your business is strong enough to handle merging another group of people into your organization. You need to consider whether you need to lay-off or downsize staff in the new organization; how to implement operating efficiencies; how to improve your market position and market share; how to increase revenues and decrease expenses; how to effectively integrate the new customers and orders into the merged or acquired business; and more. It is a lot of work to handle the management of a merger or acquisition; however the benefits are typically large too.
While vertical mergers are about merging with suppliers or customers, horizontal mergers are about merging with, or acquiring, your competition. In a horizontal merger, you might want to buy your competitor to expand your product offering quickly; or to acquire their proprietary product information; or to grow your market share. Or you may be interested in the branch locations that they have (and you don't) which allow you quick entry into their markets. Consider horizontal mergers if you have an aggressive sales plan and/or an aggressive diversification plan (with diversification, a vertical merger might also work). You need to always keep in mind your strategic plan and your business objectives; but be open to opportunities that are presented to you (for example, a long term supplier wanting to downsize the operation by selling off a division of the company).
Growth through merger or acquisition is inorganic growth and it can be expensive. Make sure that your investment in an acquisition or merger (there are high costs to both) has enough payback to make it worthwhile. Hire a specialist in merger or acquisition accounting to provide a review of your target company before you complete the deal. Organic growth is internal to the business and occurs through sales, product development, production efficiencies, and other internal improvements. There are many key success factors for a successful merger or acquisition. Some of these success indicators are: your business is capable of the change management process that will result from the merger or acquisition; the merger or acquisition aligns with your business plan and is a cost-effective method of increasing your market share; the merger or acquisition provides an opportunity to significantly reduce your costs through synergies and new economies of scale; and the merger or acquisition allows you to improve customer service or to satisfy unhappy customers (for example, by buying a supplier you shortened the lead time required to manufacture the end product).
Mergers and acquisitions have been a popular strategy for business growth over the past decade. A vertical merger strategy can be more successful than an acquisition or horizontal merger because it is not as adversarial in nature and therefore is often managed more successfully. Before you make a decision for inorganic growth, develop your merger acquisition checklist to ensure you understand what it takes to make this strategy a success. Make sure you consider the costs along with the benefits if you are considering mergers or acquisitions as your growth strategy.
Mergers and acquisitions are different. An acquisition is often considered an offensive action; it is a take-over of another company and often that take-over can be hostile. A merger is usually considered a friendlier, defensive maneuver, with both companies agreeing to merge. There is a difference between mergers and acquisitions. A merger is often viewed as a more 'friendly' action; a decision amongst both parties to merge together. Mergers and acquisitions accelerate growth, they can be useful if you want to improve your market position (or protect it), and they can help you achieve your strategic objectives for your business in a relatively economical manner. There will always be some challenges in either a merger or acquisition; the most significant challenge is managing the change of blending or acquiring two organizations while still realizing the benefits.
The challenges of merging or acquiring two businesses are significant. You need to ensure that the culture of your business is strong enough to handle merging another group of people into your organization. You need to consider whether you need to lay-off or downsize staff in the new organization; how to implement operating efficiencies; how to improve your market position and market share; how to increase revenues and decrease expenses; how to effectively integrate the new customers and orders into the merged or acquired business; and more. It is a lot of work to handle the management of a merger or acquisition; however the benefits are typically large too.
While vertical mergers are about merging with suppliers or customers, horizontal mergers are about merging with, or acquiring, your competition. In a horizontal merger, you might want to buy your competitor to expand your product offering quickly; or to acquire their proprietary product information; or to grow your market share. Or you may be interested in the branch locations that they have (and you don't) which allow you quick entry into their markets. Consider horizontal mergers if you have an aggressive sales plan and/or an aggressive diversification plan (with diversification, a vertical merger might also work). You need to always keep in mind your strategic plan and your business objectives; but be open to opportunities that are presented to you (for example, a long term supplier wanting to downsize the operation by selling off a division of the company).
Growth through merger or acquisition is inorganic growth and it can be expensive. Make sure that your investment in an acquisition or merger (there are high costs to both) has enough payback to make it worthwhile. Hire a specialist in merger or acquisition accounting to provide a review of your target company before you complete the deal. Organic growth is internal to the business and occurs through sales, product development, production efficiencies, and other internal improvements. There are many key success factors for a successful merger or acquisition. Some of these success indicators are: your business is capable of the change management process that will result from the merger or acquisition; the merger or acquisition aligns with your business plan and is a cost-effective method of increasing your market share; the merger or acquisition provides an opportunity to significantly reduce your costs through synergies and new economies of scale; and the merger or acquisition allows you to improve customer service or to satisfy unhappy customers (for example, by buying a supplier you shortened the lead time required to manufacture the end product).
Mergers and acquisitions have been a popular strategy for business growth over the past decade. A vertical merger strategy can be more successful than an acquisition or horizontal merger because it is not as adversarial in nature and therefore is often managed more successfully. Before you make a decision for inorganic growth, develop your merger acquisition checklist to ensure you understand what it takes to make this strategy a success. Make sure you consider the costs along with the benefits if you are considering mergers or acquisitions as your growth strategy.
About the Author:
To learn more about success factors for a vertical merger; diversification options, and other business strategies to build and grow your business, visit Kris Bovay's More For Small Business site.
By Dimas Prast
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