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Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide by Patrick A. Gaughan

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Chapter 6

Vertical Integration

While horizontal integration refers to combinations between competitors, vertical deals involve companies that have a buy-sell or upstream-downstream relationship. While they may not be as common as horizontal deals, there are still countless examples of vertical integration merger and acquisitions (M&A). The key question is what is the track record of such vertical deals? Unfortunately, too often it is questionable. In some instances and situations, it makes good sense for the companies involved. In these cases, vertical integration may be the best solution to a problem such as having a dependable source of supply. In other instances, it may fail to yield real benefits and result in a waste of corporate resources that could be better applied elsewhere.

Benefits of Vertical Integration

The benefits of vertical integration vary depending on the industry. When the deals involve, for example, a manufacturer buying a retailer, the deal may allow the manufacturer to gain better access to the ultimate consumers of their products. Similarly, in the petroleum industry, many of the larger companies have been vertically integrated for many years. It is common to see oil companies be involved, in exploration, transportation, and pipelines and refining, while also owning a large network of gas stations. When they are involved in all these areas, we say they are fully vertically integrated. Whether that is good or not is a debatable issue.

Risk and Vertical Integration ...

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