The advantages and disadvantages of vertical integration

Julie Brownlee, Fsp Invest, 24 Nov. 2015

Tags: vertical integration, what is vertical integration, types of vertical integration, mergers, company mergers,



In the world of stocks and shares, there is a fair number of mergers and acquisitions.

One way for this to happen is through vertical integration.

So what exactly is vertical integration? And what are the pros and cons for you as an investor?

Read on to find out more…



What is vertical integration?


Vertical integration is when two companies which are at different stages of production merge to form a larger company. In other words, a company caters to more or all parts of its supply chain.

There are different types of vertical integration.

Upstream or backward integration is when a merger takes place to bring a company back closer to the initial source of its product.

Downstream or forward integration is when a merger take place to take a company closer to its final customer.


An example of vertical integration


Vertical integration works well in the oil industry…

Take a global oil giant like BP. The company began taking crude oil out of the ground. Over the years it became vertically integrated as it bought refineries, petrol stations and chemical companies.

This is an example of downstream or forward integration.


The pros and cons of vertical integration


The main benefit of vertical integration is it can give a company more control over costs in its business. It may achieve this by centralising specific departments.

The main disadvantage of vertical integration is it can leave a company with many assets that aren’t contributing a lot to the bottom line.

This can lead to companies having to take steps to sell off underperforming assets.

So there you have it. The advantages and disadvantages of vertical integration.

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