INTEGRATION:

Vertical Integration:

When a merger takes place between firms engaged in different stages of the productive process we speak of vertical integration. It is ‘vertical’ in the sense that the combination is a movement up or down the productive process which runs from extraction to distribution. Thus, a large manufacturer of tea may take over tea plantations, a manufacturer of tyres may acquire rubber plantations, or a motor car manufacturer may amalgamate with a body-build firm.

Problems – A manufacturer moving ‘backwards’ to acquire the source of his raw materials may find himself with a rapidly declining asset if technology develops a superior substitute. A rubber plantation may quickly lose its value if synthetic rubber proves a superior product.

Horizontal Integration:

When firms engaged in producing the same kind of good or service are brought under unified control the procedure is thought of as ‘horizontal’ integration. If several brewery companies or motor manufacturers amalgamate it could be a union of firms all engaged in the same stage of production, and hence, horizontal.

Market domination is undoubtedly one of the motives leading to horizontal integration. Suppose, for example, there are three independent firms making a vacuum cleaner, a washing machine, and an electric heater. A merger, in this case, would enable the group to concentrate the production of each product in one factory.

Problems – The major criticism of horizontal linking is based on the obvious tendency towards monopoly as the number of firms in the industry reduces. Problems too arise where it becomes necessary to weld together into one management team managers from firms having different histories, traditions and outlooks.

Conglomerates have been identified as those mergers or amalgamations which are neither substantially vertical nor horizontal. For example, a firm producing cigarettes may take over a firm producing potato crisps, or a firm producing fertilisers may merge with a manufacturer of paint. The major aim of the conglomerate is clearly to obtain a diversification of output so as to reduce the risks of trading.