In vertical supply chains, principal$-$agent problems can arise when objectives and incentives are not aligned between a manufacturer and its suppliers. Vertical integration, where a company owns its suppliers or distributors, can be a strategic move to align incentives and reduce conflicts $($but beware of any new incentive conflicts that vertically integrating might create, such as those discussed in Chapter $22).$ This integration often leads to synergies, improving operational efficiency and value for the integrated entity. Indeed, we recommend not acquiring a customer or supplier merely because that customer or supplier is profitable $-$ there must be a synergy that makes it more valuable to you than it is to its current owners for the acquisition to be profitable.

Alpha Industries is considering acquiring Foxtrot Flooring to integrate its supply chain better. Currently, Foxtrot is valued at $$20$ million using its existing operational methods. However, Alpha sees potential synergies and believes that incorporating Foxtrot could enhance its total value to $$25$ million. This acquisition could resolve some principal$-$agent conflicts by aligning operational goals and incentives more closely. What sales price for Foxtrot do you predict, given the context of potential vertical integration benefits?

Managing Vertical Relationships $($Part d$)$

In vertical supply chains, principal$-$agent problems can arise when objectives and incentives are not aligned between a manufacturer and its suppliers. Vertical integration, where a company owns its suppliers or distributors, can be a strategic move to align incentives and reduce conflicts $($but beware of any new incentive conflicts that vertically integrating might create, such as those discussed in Chapter $22).$ This integration often leads to synergies, improving operational efficiency and value for the integrated entity. Indeed, we recommend not acquiring a customer or supplier merely because that customer or supplier is profitable $-$ there must be a synergy that makes it more valuable to you than it is to its current owners for the acquisition to be profitable.

Alpha Industries is considering acquiring Foxtrot Flooring to integrate its supply chain better. Currently, Foxtrot is valued at $$20$ million using its existing operational methods. However, Alpha sees potential synergies and believes that incorporating Foxtrot could enhance its total value to $$25$ million. This acquisition could resolve some principal$-$agent conflicts by aligning operational goals and incentives more closely. What sales price for Foxtrot do you predict, given the context of potential vertical integration benefits?

More than $$25$ million, or Foxtrot will not sell.

The different valuations make a sale very unlikely.

Something between $$20$ and $$25$ million.

Less than $$20$ million, or Alpha will not buy.