We examine the terms and timing of vertical mergers when the uncertainty concerning stochastic cost of production input provides incentives to integrate. We develop a dynamic model where the acquisition is motivated by cost efficiencies and endogenously derive a merger surplus. We show that during an economic downturn, merging is an alternative to bankruptcy as a solution for a downstream firm to stay in operation. The target in this model can delay the timing of a merger during an economic upturn by strategically postponing its default. Our results contribute to the evidence on a U-shaped pattern of merger waves. We identify industries in which pro- and counter-cyclical vertical mergers are more probable. We also provide asset pricing implications of a merger decision in different economic states.