Vertical Related Acquisition.
Vertical related acquisition (vertical integration) involves extending the production process back to the source of supply, or forward to the marketing are.
Four principal advantages are associated with vertical related acquisitions:
- Vertical chain economies may result from eliminating production steps, reducing overhead costs, and coordinating distribution activities to attain greater synergy.
- Vertical chain/horizontal scope economies can occur when a corporation's horizontally related or unrelated business units purchase from one of the corporation's business units that serves as a supplier.
- Vertical chain innovations refer to improvements or innovations that may be transferred or share among the corporation's business units in the distribution channel.
- A final advantages is a combination of vertical chain economies and chain innovations.
Vertical Unrelated Acquisition.
Vertical unrelated acquisition is undertaken with limited possibilities for transferring or sharing core competencies. In some cases, however, vertical unrelated acquisitions can result in vertical chain/horizontal scope economies, vertical chain innovations, and combinations of chain economies and innovations.
Managing vertically unrelated businesses can be associated with two major disadvantages:
- the more vertical businesses the firm owns, the higher the costs of bureaucracy, and perhaps coordination, are likely to be;
- a firm that commits itself to buying all of its needs internally may pay higher costs by failing to seek competitive bids from outside suppliers.
Formerly, the term "merger" applied to the consolidation of two companies about equal in size, whereas "acquisition" implied a larger firm taking over a smaller one. Since this distinctions is no longer consistently observed, I use the words interchangeably.