Horizontal Merger

Oh, lets talk Rock. As in -efeller. He was kind of the king of mergers, both vertical and horizontal. So let’s talk about what comprises each of these things.

In the energy industry, specifically oil, a horizontal monopoly would exist if a company owned all of the oil wells in the world. And, in fact, for a short time, OPEC owned what was very close to a monopoly, or at least an enormous percentage of all of the oil wells in the world, such that they were able to constrain supply, create panic, and increase prices some 500% and change during the 1970s.

That’s a horizontal monopoly. So what’s a vertical monopoly?

Well, in the process of processing oil, a lot has to happen for the system to work right. First step: you have to pull the oil out of the ground. But then you have to process it, or synthesize it, from dinosaur goop into something that’s actually usable in your Lexus with the turbo engine.

Then, because world demand is continuous, you have to store the oil and distribute it continuously forever and ever, and eventually the customer has to be able to pull up into a gas station and fill ‘er up. So if you owned a vertical monopoly, you would own the discovery and mining of oil, a storage company, a refining company, a trucking or distribution company, and then a bunch of gas stations.

That would be a fully integrated, vertical monopoly. So when horizontal and vertical mergers get discussed, they get framed under this format.

Let’s say we’re Keurig, and we want a vertical merger in our business, because we’re sick and tired of paying coffee growers 12 cents a cup for something that costs them less than a penny. So we at Keurig decide to buy our own coffee plantation, and roasting and grinding/processing company, so that we can supply our own coffee in our own tiny little cups.

That would be a vertical merger, and it often makes a lot of sense, because all that profit that had been given out to coffee vendors selling to the kindly, loving, caffeinated folks at Keurig, would then be kept and retained by the kindly, loving, shareholders of Keurig.

Vertical v. horizontal.

Good ways to merge, and, uh...good ways to make a baby.