Vertical mergers may take two forms. In forward integration a company buys a distribution outlet or customer and in backward integration, a company acquires a raw material source or input supplier.
Business examples of vertical mergers cover amalgamation of two or more companies producing different goods or services but for one specific finished product.In this form of reorganization a company takes over its upstream suppliers of raw materials and its downstream buyers or channels of distribution.
By directly merging with suppliers or raw materials, a company can decrease reliance on outside supply which might turn uncertain or irregular.
In examples of vertical integration, one company acquires either a customer or a supplier. In as much as horizontal mergers pose a direct threat to competition, these have been regulated more rigorously by the federal government than vertical mergers. Nevertheless, vertical mergers might be hinder market competition in some cases and may be in violation of federal antitrust or competition laws.
Apprehension is that vertical integration may foreclose competitors by limiting their access to sources of supply of raw materials or to distribution channels or customers. Vertical mergers may also be anticompetitive since their market power may thus hold back new businesses from entering the market. Both competitors as well as prospective entrants may find that both raw vital input supplies and distribution outlets stand blocked.
Vertical mergers are subject to the provisions of the Clayton Act that regulate anticompetitive activities.
In the Merger Guidelines issued by the Federal Trade Commission (FTC) in collaboration with the Anti Trust Division of the US Department of Justice (USDOJ), there are guidelines on vertical mergers.
