As I have already told you about Horizontal merger now let’s see what vertical merger is. Vertical merger can be defined as a merger which is a merger between two companies which though are in the same industry but does not sell the same product. In other words it is a merger between two companies which have a buyer and seller relationship. Hence for example if company which manufactures computers decides to merge with a company which produces processors or a sugar company decides to takeover or merge with a sugarcane producing company will be an example of vertical merger.
Hence by vertically merging one company seeks to achieve reduction in costs associated with raw materials, as well as reduction in transaction costs, transport cost and other such costs. Vertical merger can be of two types –
1. Backward Integration – In this type of Merger Company purchases or merges with the company which is the suppliers of raw materials for the purchasing company and hence it is called backward integration.
2. Forward Integration – In this type of merger, it is the supplier of raw material which purchases the company to which it is supplying, hence it is called forward integration.