Chain of Thought

Toyota May Teach Us a Lesson about Vertical Integration

MH&L has been running a lot of merger and acquisition stories lately—all indicative of a trend in the material handling industry toward vertical integration. Why do I call it a trend? Because it’s filtering into business school homework assignments.

It’s amazing what you find when you do a Google search. I plugged “vertical integration” into the search box and found the following homework assignment for a class of Georgia Tech students:

List three benefits and three drawbacks of vertical integration.

The instructor offered the following solution:

“Some potential benefits include: capture margins that occur backward or forward in the supply chain by eliminating the “middle man,” more control on the supplies (design and characteristics, visibility, availability), easier coordination through the supply chain since (hopefully) the different supply chain blocks share values and goals (e.g., to increase the shareholders’ value).

"Some drawbacks of vertical integration include: the company can lose the focus on their core business and competencies, less flexibility in creating new products or new processes given investments required and learning curves of related processes, excess capacity is commonly built to account for demand variations (vs. demand pooling), increase of bureaucracy within the company, etc.”

What the instructor failed to list under drawbacks is the potential for class action suits by shareholders who feel they’re not enjoying the increased shareholder value listed under benefits.

That was the case in the TICO/Cascade acquisition we reported on recently. Cascade's public shareholders stated that Cascade's directors and company management will obtain special benefits not available to them, including millions of dollars in company stock options, performance share units, performance accelerated restricted stock units and, perhaps most importantly, the value Toyota Industries Corporation will enjoy from having access to the leading attachment manufacturer, which they feel is not reflected in the transaction price of $65 per share.

An attorney who read our recent blog on that actually did a pretty good job filling in the list of drawbacks in that assignment—like what happens if the company you bought does a lot of business with your competitors?

“TICO’s competitors may be more worried about how this vertical integration might affect price competitiveness,” said Jason Graham, a partner with the Atlanta law firm of Graham & Penman, LLP.

He also recommended a solution:

“It will be important to maintain pricing transparency on internal sales from Cascade to TICO, not only to avoid antitrust concerns that often accompany a vertical integration merger, but also to maintain a perception of fairness to consumers of Cascade’s products so that they do not feel like they are merely subsidizing a competitor at the Cascade level to then be able to undercut them on price at the TICO level.”

A distributor of a competitive brand of lift trucks told me he understood the fears of Cascade shareholders, especially the one about what happens if many of Cascade's customers start doing business with Cascade’s competitors.

I asked this distributor if he felt this case equaled that of the Amazon acquisition of Kiva—potentially requiring Amazon’s retail competitors to come to them if they want to purchase Kiva’s robotic stock retrievers. He saw my point, but he believes the competitive impact of the TICO/Cascade deal will be stronger.

The TICO folks are smart, so I’m sure they made several trips to the blackboard when considering this acquisition. I’m also sure they expect to teach their competitors a lesson about vertical integration once all the chalk dust settles.

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