Legal Definitions - vertical merger

A vertical merger occurs when two companies that operate at different stages of the same production process or supply chain combine to form a single entity. This means one company might acquire a supplier (an "upstream" merger) or a distributor or customer (a "downstream" merger). The primary aim is often to gain greater control over the supply chain, reduce costs, improve efficiency, or secure access to critical inputs or distribution channels.

Here are a few examples to illustrate this concept:

• Imagine a company that manufactures high-end smartphones. This company decides to acquire a semiconductor fabrication plant that produces the specialized chips essential for its phones. This is a vertical merger because the phone manufacturer (downstream, assembly) is acquiring a key supplier (upstream, component production). By doing so, the phone company gains direct control over the supply and quality of a critical component, potentially reducing costs and ensuring a stable supply.

• Consider a large dairy farm that specializes in organic milk production. The farm decides to purchase a regional chain of grocery stores that previously bought and sold its milk. This is also a vertical merger because the dairy farm (upstream, producer) is acquiring a distributor and direct customer (downstream, retail). This allows the farm to control the entire process from production to sale to the consumer, potentially increasing profit margins and ensuring its products are prominently displayed.

• Think about a software development firm that creates popular video games. This firm acquires a company that owns and operates a global network of servers and data centers, which are used to host the online multiplayer components of its games. This represents a vertical merger because the game developer (upstream, content creator) is acquiring a critical service provider (downstream, infrastructure for distribution and operation). This move could improve game performance, reduce hosting costs, and give the developer more control over the player experience.