Include Companies in Your Vertical on Your M&A Target List
Your vertical is the supply chain for your industry. That’s it. If you do an M&A deal with an entity above or below you on that chain, you’re integrating vertically.
For example, if your company is a paint distributor that sells paint to retail stores, the manufacturers are your vendors and the retail stores are your customers. If you want to sell your paint distributor, you may consider contacting your suppliers, the paint manufacturers, thinking they may be interested in doing their own distribution.
In most cases, however, the paint manufacturers probably don’t want to get into the distribution business because distribution means carrying many different types of brands.
The paint manufacturers would inherently have a conflict of interest: They would want to sell their own products and would have little or no incentive to sell a competitor’s brand. Plus, the competitors would be less inclined to sell to the manufacturer-owned distributor, likely lowering revenue and profits.
Or maybe you think to target one of your customers, such as a retail store chain. Although the retail chain may be able to cut out some costs by acquiring a distributor, the reduction in costs to the retail stores would come at the cost of reduced profits to the distribution business, making acquiring that business less lucrative.
And other retail stores may decide to find another paint distributor, thus further reducing the revenues and profits of the acquired distribution business.