An example of a vertical merger is when a car manufacturer acquires a tire manufacturer. Another instance of vertical merger is when a company that manufactures shoes merges with a company that produces leather.
A vertical merger occurs when two companies within the same supply chain join together to form one company. This is in contrast to a horizontal merger, in which competitors combine under single ownership.
There are two types of vertical mergers: forward integration and backward integration. The example of a car company acquiring a tire company is an instance of backward integration, because the acquiring company is further down the production line than the acquired company. Within the same industry, forward integration occurs if a car manufacturer purchases an automobile distributor. This is forward integration, because the entity acquiring the other is further back in the chain from raw materials to purchase by customers.
Vertical mergers are performed in order to lower costs associated with production and increase output capacity. The more components of the finished product can be controlled by one entity, the greater the ability to control costs by avoiding mark-ups and production inefficiencies. Negotiation costs and the cost of seeking out suppliers is also reduced.
This type of merger also allows a company to increase the difficulty for competitors obtaining these supplies, and may result in an increase in costs for competing companies.