vertical merger

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Vertical mergers

By Chetan Krishna H G


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Definition

A vertical merger is one in which a firmor company combines with a supplier ordistributor.

Vertical merger involves firms in abuyer seller relationship i.e.manufacturer merging with a supplier of

component products or a manufacturermerging with the distributors of itsproducts.

Vertically integrated companies in


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Types of vertical mergers

There are two types of vertical mergers,namely

Backward integration (upstream): Acompany exhibits backward verticalintegration when it controls subsidiariesthat produce some of the inputs used in

the production of its products. Forward integration (downstream):

A company tends toward forward

vertical integration when it controls


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Example of forward andbackward integration


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A RECENT EXAMPLE OF GOOGLE -MOTOROLA MOBILITY MERGER


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Background of the case

Google is the developer of worlds mostpopular Smartphone Operating System

The Android .

Motorola Mobility Holdings,Inc. (NYSE: MMI), formerly the MobileDevices division of Motorola Inc. until

January 2011, is a communicationscorporation headquarteredin Libertyville, Illinois, a Chicagosuburb.

This is the case of su lier of OS


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Background of the case

In the mid-1990s. Motorola had acommanding lead inthe analog cellphone market, but failedto move quickly to digital technology,giving a way for global rivals suchas Nokia and Samsung Electronics toleap ahead.

Motorola continued to experience a majorcrisis with its handset division, whichrecorded a $1.2 billion loss in Q42007. Its global market share had been

continuously on the decline; from 18.4%


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Reasons for merger

Android is facing more than 40 lawsuitsin US alone from different phonemanufacturers.

These lawsuits are mainly due to patentsand copyrights (phone apps).

Motorola has a ownership of

approximately 17500 patents andanother 7,500 applications.

The total value of these patents is

atleast $5 billion and quality of the


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The Deal


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Details of the merger

On 15th Aug 2011, Google announcedthat it is acquiring Motorola Mobility. Thesearch and online advertising company

is buying the company for approximately$12.5 billion (or $40 per share), in cash.

The price represents a premium of 63percent to the closing price of MotorolaMobility shares the previous Friday.Google had about $39 billion in cash atlast count.

The merger is to better protect Android


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Details of the merger

On 28 sept 2011, the US Department ofJustice asked for more details of the

deal.

This was to verify whether the dealoffers unfair advantage over theircompetitors.

The review process is expected toprolong for a few more months.

On November 17, 2011, Motorola

announced that its shareholders voted infavour of the com an 's ac uisition b


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Anti Competitive concerns

Googles press release had the followingstatements which addressed the anti competitive concerns.

The acquisition of Motorola Mobility willenhance competition in mobilecomputing.

Motorola Mobility will remain a licenseeof Android.

Android will remain opento othersmartphone manufacturers.


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Conclusion

The main motive behind the merger is toget hold of the Patents that are underthe ownership of Motorola.

In this way Google can reduce thenumber of lawsuits that it is currentlyundergoing.

There are other vertically integratedcompetitors as well namely Apple andBlackBerry (with RIM).

In the future they may spin off theMotorola hardware business.


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