In business management, vertical integration is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. Vertical integration has also described management styles that bring large portions of the supply chain not only under a common ownership, but also into one corporation.

Vertical integration and expansion is preferred because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. Vertical integration and expansion can become unattractive when its actions become anti-competitive and hinder free competition in an open marketplace. Vertical integration is one method of avoiding the delay problem. A monopoly produced through vertical integration is called a vertical monopoly. For example, Google purchased “Motorola Mobility” in 2012 as a dedicated Android partner which enabled Google to supercharge the Android ecosystem for enhancing competition in mobile computing. The deal didn’t end here. In 2014m Chinese firm Lenovo acquired the Motorola Mobility smartphone business from Google for $2.91 billion in a cash-and-stock deal. The acquisition would strengthen Lenovo’s position in the smartphone market and grow its presence in the USA.

A company that undergoes vertical integration acquires a company that operates in the production process of the same industry. Some of the reasons why companies choose to integrate vertically include strengthening their supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new distribution channels. To do this, one company acquires another that is either ahead or behind it in the supply chain process.

Vertical Integration strategy is important for many companies for several more reasons. Not only does it increase profits from the newly acquired operations by selling its products directly to consumers, it also guarantees efficiencies in the production process, and cuts down on delays in delivery and transportation.

For example, Ikea furniture to gain control over its raw materials for its flat pack furniture, purchased woodland in Romania and the Baltics to coordinate its own forestry management and wood production. The Swedish company’s investment will allow the retailer to stabilize its timber costs, at a time when prices are on the rise.

Companies can integrate vertically in two ways: backward or forward. Backward Integration occurs when a company decides to buy another company that makes an input product for the acquiring company’s product. For example, Apple retails most of its apps online through Apple Store.

Forward Integration occurs when a company decides to take control of the post-production process. For example Amazon.com Inc’s acquisition of grocery store chain ‘Whole Foods Market’ for $13.7 billion will help them dominate grocery sales both offline and online. However, so far the deal markedly expanded Amazon’s reach offline.

Advantages of Vertical Integration: 

Helps in avoiding supply disruption: The first benefit is that the company can avoid supply disruption. By controlling its own supply, it can avoid the problems of sluggish suppliers. It also in neglecting the frequent strikes and labor disputes from companies those are in socialist countries such as China, Vietnam.

Avoid monopoly suppliers: Second, a company benefits by avoiding suppliers with a lot of market power and their dictations. It gets all the more critical if the supplier has monopoly in market. If the company can go around these providers, it reaps many benefits. It can lower internal costs and have better delivery of needed items. It’s less likely to be short of critical elements.

Economies of scale: Third, vertical integration gives a company better economies of scale. That’s when the size of the business allows it to cut costs. For example, it can lower the per-unit cost by buying in bulk. Another way is to make the manufacturing process itself more efficient. Vertically integrated companies eliminate overhead by consolidating management.

Imitation becomes easier: A retailer with vertical integration knows what is selling well. It can easily “knock off” the most popular brand-name products; because it copies the ingredients or manufacturing process. It creates similar, store-branded products with similar marketing messages and packaging. Only powerful retailers can do this. The manufacturers of those brands cannot afford to sue for copyright violation. They are unwilling to risk losing distribution through a major retailer.

Lower the cost: The fifth advantage is the one that is most obvious to consumers. That’s low prices. A company that is vertically integrated can lower costs. It can transfer those savings to the consumer as lower prices. The best example is of Wal-Mart.  The store keeps costs low by using a sophisticated and largely automated supply-chain management system, Wal-Mart has huge bargaining power when it comes to its suppliers. Many brands depend on Wal-Mart sales to stay in business, while even larger, established companies can little afford to be removed from Wal-Mart’s passageway or WebPages.

Disadvantages: The biggest disadvantage of vertical integration is the expense. Companies must invest a great deal of capital to set up or buy factories. They must then keep the plant running to maintain efficiency and profit margins.

Secondly, it reduces flexibility. Vertically integrated companies get entangled in the profitability of its operations. Retailers can’t follow consumer trends that take them away from their factories. They also can’t change factories to countries with lower exchange rates. Also, vertically integrated suppliers must manage inventory by keeping sufficient stock products in their stores. A third problem is a loss of focus. Running a successful vertically integrated business requires a different set of skills; it’s difficult to find capable staff.

Mergers & Acquisitions are part of strategic management of any business. It involves consolidation of two businesses for increasing market share, competitive advantage, and profits and to an aim to become leader in the industry. Mergers and Acquisitions are complex processes which require preparing, analysis and deliberation.

It’s been observed that the mismatch of work culture leads to dissuade working environment, which in turn ensure the downturn of the organization. Flawed intentions often become the main reason behind the failure of mergers and acquisitions. Companies often go for mergers and acquisitions getting influenced by the booming stock market.

A merger is a corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both organizations; merger creates a new brand. In case of an acquisition, it occurs when one company buys most or all of another company’s shares. If a firm buys more than 50% of a target company’s shares, then it effectively gains control of that company. An acquisition refers to the takeover of one entity by another. It has been observed that an acquisition is often friendly and a takeover can be hostile. A takeover is a particular form of acquisition that occurs when a company takes control of another company without the acquired firm’s agreement.

There are different types of mergers:

 A Horizontal merger happens when two companies exist in the same industry come together to increase their reach. Typically, this type of merger is done between direct competitors. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies’ business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. The best way to think about horizontal mergers is to look at how start-up companies get acquired by larger companies either to absorb their technology, which are used by the larger company to fill a gap they have or because they are posing a threat and have somehow captured part of the market that the bigger company has been trying to figure out.

Times Bank merged with HDFC Bank, Bank of Madura with ICICI Bank, Nedungadi Bank with Punjab National Bank etc. in consumer electronics, acquisition of Electrolux’s Indian operations by Videocon International Ltd.

When a merger between firms that are involved in totally unrelated business activities happens it’s called Conglomerate merger. . There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

An example of conglomerate merger is L&T and Voltas’ ship building arm’s merger. Larsen & Turbo (L&T) is India’s largest engineering company with expertise in wide area like infrastructure, oil and gas, power and process. And Voltas a Tata group company, is a major player in the electro-mechanical Engineering.

A Product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger market segment. This ensures that they earn higher profits.

Broadcom Inc. is an American designer, developer, manufacturer and global supplier of a broad range of semiconductor and infrastructure software products, it acquired Mobilink Telecom Inc. is an example of a products extension merger. Mobillink manufactures product designs meant for handsets that are equipped with Global System for Mobil Communications technology. Mobilink’s products complement Broadcom’s products.

A merger between two companies producing different goods or services for one specific finished product. A Vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

Trilix Srl is a design and engineering company and design and engineering services in the automotive sector, specifically styling, architecture, packaging, surfacing, macro and micro feasibility, and detailed engineering development. The company is based in Grugliasco, Italy. With a turnover of €4 million and net profit of €2, 50,000, the company offers design and engineering services in the automotive sector. As of September 2010, Trilix Srl has been operating as a subsidiary of Tata Motors Ltd. } Tata Motors Ltd had acquired 80% stake in Trilix Srl, an Italian design and engineering firm for €1.85 million (Rs. 11.29 crore).

What is a takeover? A takeover occurs when one company makes a bid to assume control of or acquire another, often by purchasing a majority stake in the target firm. In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target. Takeovers are typically initiated by a larger company for a smaller one. They can be voluntary, meaning they are the result of a mutual decision between the two companies. In other cases, they may be unwelcome, in which case the larger company goes after the target without its knowledge. A takeover, which merges two companies into one, can bring major operational advantages and improvements to performance and for shareholders.

Mergers and acquisitions are inevitable in the corporate world. Acquisitions can be friendly as well as hostile. A friendly acquisition is one in which controlling group of the target company sells its shares to another group wilfully. However, if the management of the target company is unwilling to negotiate, the acquirer can directly approach the shareholders of the company by making an open offer. This is known as a Hostile takeover.

L&T has acquired 4.5 lakh shares of Mindtree from the open market. In all, the infrastructure major is eyeing up to 66 per cent stake in Mindtree for around Rs 10,800 crore, marking the country’s first-ever hostile takeover bid in the information technology industry.

In 1998, India Cements Limited (“ICL”) in its hostile bid for Raasi Cements Limited (“RCL”) made an open offer for RCL shares at Rs 300 per share at the time when the share price on the Stock Exchange, Mumbai (“BSE”) was around Rs. 100. In this case investors felt cheated as the promoters themselves sold out their stake to the acquirer leaving little room for them to tender their stake to the acquirer during the open offer. However, ICL also bought out the FIs in the open offer and thereby increased their holding in RCL to 85%.

A Reverse takeover or reverse merger takeover is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.

When ICICI bank emerged it used its parent company name Industrial Credit & Investment Corporation of India. Industrial Credit and Investment Corporation of India (ICICI) was established in 1955 as public limited company under Indian Company Act, for developing medium and small industries of private sector.

A Back -flip takeover is a rare type of takeover in which the acquirer becomes a subsidiary of the acquired or targeted company after deal completion. The combined entity retains the name of the acquired company.

For example, AT&T was taken over by SBC (construction & Development Company) but AT&T name was continued as it was a well known established brand name. Such takeovers take place when the well known named company is short of resources to run the company and lesser known company is cash rich and searching for an investment opportunity. Although there can be many motives behind any takeover, merger or acquisition.

Conclusion: Mergers and acquisitions have become a popular business strategy for companies looking to expand into new markets or territories, gain a competitive edge, or acquire new technologies and skill sets. M&A are especially popular in the professional services space with the growing wave of retiring Baby Boomers and a rapidly changing economy and marketplace.

Some negative facts about synergy are that many of the attempts to synergise never get beyond a few obligatory meetings. Others generate a quick burst of activities and then slowly fade out. Others become permanent corporate fixtures without ever fulfilling their original goals. In short, the attempts are termed as ‘learning experience’ to coax the failures.  The quest of synergy often represents a major opportunity cost as well. It distracts managers’ attention from the nuts and bolts of their businesses, and it gushes out other initiatives that might or might not generate real benefits. At times, the synergy programs actually backfire, eroding good relations with customers and marketing channels damaging brands, or damaging employee morale. A simple fact is, many synergy efforts end up destroying value rather than creating it. Synergy is sought in all functional areas by businesses.

What does Operating Synergy mean?

When the combined value of two firms is greater than the sum of the separate firms apart and, when the combined firm allows for the firms to increase their operating income and achieve higher growth it is termed as ‘’Operating synergy’.’ Operating synergies arise from the following:

Economies of scale, greater pricing power and higher margins resulting from greater market share and lower competition, combination of different functional strengths such as marketing skills and good product line, or higher levels of growth from new and expanded markets.

Operating synergies are achieved through merger, acquisition or takeovers of firms which have competencies in different areas such as production, research and development or marketing and finance can also help achieve operating efficiencies. Tata Steel which is one of the biggest Indian steel companies; it took over Corus which was Europe’s second largest steel company in 2007. Tata Steel’s takeover of the European steel major Corus for the price of $12.02 billion made the Indian company, the world’s fifth-largest steel producer. The acquisition was intended to give Tata steel access to the European markets and to achieve potential synergies in the areas of manufacturing, procurement, R&D, logistics, and back office operations.

What does Financial Synergy mean?

Financial synergies are most often appraised in the context of mergers and acquisitions, but latest strategic alliances include strategic partnerships. These types of synergies relate to improvement in the financial metric of a combined business such as revenue, debt capacity, cost of capital, profitability, etc. Examples of positive financial synergies include: Increased revenues through a larger customer base, lower costs through streamlined operations, talent and technology harmonies.

In addition to above, financial synergies can result in the following benefits post acquisition: Increased debt capacity, greater cash flows, lower cost of capital, tax benefits etc. The Renault-Nissan (Franco – Japanese) strategic partnership or car making alliance expects to generate 5.5 billion euros ($6 billion) of synergies in 2018 by integrating more divisions and sharing resources better within the partnership. Increased union between the French carmaker and its 43.4 percent-owned Japanese partner generated more than 4 billion euros in synergies in 2015.

The two companies go together to benefit from cost cutting.  As of December 2016, the Alliance is the world’s leading plug-in-electric vehicle manufacturer, with global sales since 2010 of almost 425,000 pure electric vehicles, including those manufactured by Mitsubishi Motors which is also now part of the Alliance. The strategic alliance partnership between Renault and Nissan is not a merger or an acquisition. The two companies are joined together through a cross-sharing agreement. The structure was unique in the auto industry during the 1990s consolidation trend and later served as a model for General Motors and PSA Peugeot Citroen.

What is Marketing synergy

Marketing synergy implies that the marketing-mix makes for overall effectiveness. For example, by grabbing an opportunity which makes it possible to gain increased utilisation of existing marketing and distribution facilities, it may be possible to enhance sales revenues without causing a proportionate increase in costs. Hero Honda Ltd was a joint venture between Hero Cycles of India and Honda Motor of Japan. Hero Cycle’s long experience about Indian road conditions including Indian rural and urban customers was wholly combined with Honda Motor’s superior technological capability to create the expected  synergy effect for producing a highly fuel efficient and sturdy motor cycle to suit the exact requirements of the Indian customers and meet the rough road conditions as early as 1985. The partnership lasted for 26 years.

What is Synergy Bias

The quest of synergy often distracts managers’ attention from the nuts and bolts of their businesses. It has been observed that most corporate executives, whether they have any special insight into synergy opportunities or not, feel they ought to be creating synergy. The achievement of synergy among their businesses is vividly linked to their sense of their work and worth. In large business groups, the synergy bias reflects executives’ need to justify the existence of their corporation, particularly to investors. Perhaps primarily, it reflects executives’ real fear that they would be left without a role if they are not able to promote coordination, standardization, and other links among the various businesses they control.

The synergy bias becomes an obsession for some executives. Desperately seeking synergy, they make unwise decisions and investments. It’s been observed that when companies with surplus human resources in terms of skilled managers and staff can best be utilized only if they have problems to solve. When organizations start utilising their senior managers and skilled staff for focusing on synergy, they tend to lose focus due to failure to devise a concrete plan with suitable involvement and control, and lack of establishing necessary integration processes. Ebay purchased Skype for USD 2.6 billion, later to be sold at just USD 1.9 billion after four years, was a failure due to challenges in technical integration and over-expectations from customers. Ebay expected synergy coming from Skype being established as the communication medium between buyers and sellers on its marketplace platform, which unfortunately did not become popular among its market participants. Avoiding such failures is possible which requires a whole new way of looking at and thinking about synergy.

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