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Agribusiness Series

Basic Steps To A Merger:


A Planning Tool For Cooperatives
Oklahoma Cooperative Extension Service • Division of Agricultural Sciences and Natural Resources F-893

Phil Kenkel
Extension Economist

M ergers and acquisitions occur in all forms of


business; hence, they have generated a variety
of opinions such as:

Mergers and acquisitions improve efficiency, transfer


compete for market share over a period of time. When
successful, a merger allows both cooperatives a favorable
reputation and customer goodwill to be transferred to a leaner
organizational form. Most importantly, a business combina-
tion between cooperatives is one method of maintaining
scarce resources to higher value uses and stimulate service to the members and also maintaining the cooperative
effective management... (The President’s Council of presence in the marketplace.
Economic Advisors, 1985). Some cooperatives see mergers or other forms of busi-
ness combinations as a means of acquiring facilities more
Out of five mergers, two are outright disasters, two cheaply than by building. The possibility of acquiring facilities
neither live nor die, and one works (Peter Drucker, at “bargain” prices does not necessarily imply a bad deal for
Management Expert, Forbes, January 1982). the other cooperative. The value of a facility to the acquiring
firm is determined by the return which the facility will provide
Over half of the managers responding to a recent OSU survey under their management. It may be that the acquiring firm can
had either been involved in a merger during the last five years better utilize the capacity, provide superior management, or
or were anticipating one within the next five years. A merger augment the capacity with other equipment. The value of the
or reorganization may provide a means of reducing costs, facility to the acquiring firm is based on the return they
increasing market share, and more efficiently meeting mem- anticipate when the facility is fully consolidated under their
ber needs. However, according to surveys conducted by the management. Thus, the combination can be a positive deal
Agricultural Cooperative Service, not all cooperative mergers for the memberships of both firms.
are successful. Analyzing a merger opportunity and imple-
menting a merger are the most difficult challenges a coopera- What in the World is Synergism?
tive board and manager will ever undertake. The purpose of
this fact sheet is to describe the basic steps involved in Synergism occurs when the earnings of the combined
analyzing a merger. cooperatives can be made greater than the earnings of the
uncombined firms without sacrificing any member services.
In this case, the “merger math” comes out 2 + 2 = 5. Sources
Why Get the Urge to Merge? of synergism include:
Mergers, consolidations, and acquisitions fall under the • Combining duplicate functions
broad category of business combinations. Fundamentally, a • Better utilizing excess capacity in one or both organiza-
business combination is a growth strategy. That is, at least tions
one of the cooperatives involved must perceive benefits to • Achieving economies of scale
growth. These benefits might include increased market power, • Risk-spreading
the opportunity to add new business lines, or the potential for • Reducing the cost of capital
increased efficiency. Unfortunately, some cooperatives con- • Better cash and inventory management
sider a merger only when their financial condition has deterio- • Increased market power.
rated to the point that no other options are available. Specific examples of synergism include reduced person-
Unlike other methods of expansion, a business combina- nel costs, reduced accounting costs, and reduced auditor and
tion allows for almost instantaneous growth. Business com- consultant fees. Most merged cooperatives operate with a
binations allow the firm to increase its physical facilities, smaller staff than the total of the pre-merged firms. Obviously,
market trade area, and personnel base. A merger not only one manager position is often eliminated. The merger may
avoids the time lag of internal growth, but it also avoids also allow two bulk fuel routes to be combined or for the
destabilizing the marketplace by having two cooperatives bookkeeping responsibilities to be combined with a net per-

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Oklahoma State University
sonnel savings. Auditing and consulting fees may also be Figure 2. Statutory consolidation of cooperative A and
reduced since it is easier to provide these services to one cooperative T.
large firm than to two smaller entities. In some cases, a
merger has made it feasible to dedicate an employee to
functions previously filled by consultants (such as regulatory
compliance). The replacement of consulting fees with in-
house expertise can represent another source of savings.
Some cooperatives have improved their cash management,
inventory management, and marketing operations subse-
quent to a merger since they became large enough to utilize
more sophisticated management techniques.
Unfortunately, mergers and other combinations also
have many negative aspects. In some cases, the merger
math comes out 2 + 2 = 3. If not handled properly, a merger
can lead to bad feelings and a loss of membership identity with
the cooperative. The combination can also lead to internal
conflicts as the manager attempts to blend two different firm
cultures into a single unit. At times, a manager who has done
an excellent job with a smaller cooperative is unable to
effectively manage a larger firm. Not only does the merger put
new stresses on management capabilities, it may also require Figure 3. A “purchase of assets” combination.
the manager to delegate more effectively and require consid-
erably more communication and people skills. Some coop-
eratives have also avoided major problems in the merger
process but have found that the expected savings never
materialize.

Types of Business Combinations


The reorganization of two or more firms into a single firm
can be accomplished in three basic ways. Under a merger
(Figure 1), all of the assets and liabilities of the dissolving firm
are transferred to another firm. All of the stock in the
dissolving firm is retired, in exchange for cash, bonds, or stock
in the surviving firm. A consolidation (Figure 2) is an
alternative form of reorganization in which two or more firms
dissolve and a new firm is formed. Once again, all of the
avoid taking on any liabilities (such as liabilities for environ-
assets and liabilities are transferred to the new firm, and the
mental clean-up) which may be associated with the other firm.
stock of the original firms is retired. An acquisition occurs
While the form of the combination has important legal implica-
when one firm purchases another firm. The acquired organi-
tions, each of these alternatives raises similar issues for the
zation may or may not survive. A purchase of assets acqui-
board, manager, and membership.
sition (Figure 3) occurs when only the assets of a firm are
transferred to an acquiring firm in exchange for cash and/or
stock in the other firm. The transferring firm typically uses the A Strategic Planning Approach
proceeds of the sale to pay off the liabilities, and eventually Cooperatives differ in their approach to mergers. In some
dissolves. Cooperatives may use the purchase of assets cooperatives, the directors maintain a discouraging tone
strategy to acquire only some aspects of another firm or to toward mergers, but would probably consider a merger if it
were presented to them. In other organizations, the board
Figure 1. Statutory merger of cooperative into coopera- may take a proactive role in aggressively pursuing a merger
tive A. or acquisition opportunity. Decisions involving mergers and
reorganization fall under the general category of strategic
planning. Strategic planning involves answering questions
such as:
• What is the purpose of our organization?
• Who do we serve?
• What are our strengths, weaknesses, opportunities,
and threats?
• Where do we need to take this company?
• How do we plan to get there?
Viewing mergers and acquisitions within the context of strate-
gic planning facilitates a proactive rather than a reactive
approach. It may also help the cooperative avoid tying up too

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much time, energy, and effort in pursuing mergers at the • Review of feasibility study
expense of operations and other types of opportunities. • Approval by board of directors at each cooperative
• Presentation and approval at joint board meeting.
Basic Steps in a Merger Step 4-Formal Feasibility Study
The evaluation and negotiation of a merger are a major The most crucial step within the calendar of events is the
business decision. Your attorney, auditor, and banker are formal feasibility study. The study should consider the last two
important sources of expertise and assistance. Other outside years’ financial information for each organization as well as a
resources include business consultants, regional coopera- projected balance sheet and statement of operations for the
tives, and university experts. Each merger situation is differ- combined operation. The study should also include historic
ent, but most successful mergers involve the same basic and projected financial ratios for the separate firms and the
steps: combined organization including:
• Informal discussion • Current Ratio
• Formation of a steering committee • Member Equity to Term Debt
• Determining a calendar of events • Member Equity to Total Assets
• Formal feasibility study • Return on Assets
• Negotiating the merger agreement • Expense Ratios
• Membership approval Salary and Wage Expense to Gross Income
• Implementation of the reorganization. Fixed Expense to Gross Income
Step 1-Informal Discussion Total Expense to Gross Income
Possible expense savings can be identified by a two-step
The first step of the process involves an informal discus- process. First, the study should indicate what savings can be
sion by the board of directors. The board should consider the realized without making operational changes. Examples of
history of the cooperative, the present status, and, above all, this type of savings include reduction in insurance premiums
what the cooperative should do to survive, prosper, and meet or annual audit expenses. Secondly, the study should outline
members’ needs. The basic objective at this stage is to what savings can be generated through changes in opera-
determine if further investigation is warranted. Some factors tions. The elimination of a general manager, the elimination
to consider at this stage include: How well do the business of a service station, or the combination of fuel delivery routes
activities match the cooperative’s core areas? Do the trade would be examples of this type of expense savings.
areas fit together or side-by-side? Is the merger partner a In addition to the financial analysis, the membership
viable, on-going concern? Does the potential for merger merit characteristics of both cooperatives should be analyzed.
a formal study? This stage of the merger process generally Document the location, condition, and utilization rate of the
ends with the board’s passing a formal resolution to investi- plant facilities. A list of the specific assets and liabilities which
gate a merger. are involved in the merger or acquisition should be developed.
Step 2-The Merger Steering Committee A method for evaluating inventory (cost or market value) and
accounts receivable assets (how much should be discounted)
When the informal study and discussion by the board are must be agreed upon during the study process. The study
favorable, the next step is to appoint a steering committee should also include an environmental audit. The purpose of
composed of board members from the two cooperatives. The the environmental audit is to determine if any of the assets
committee should avoid any premature announcements con- acquired may have associated environmental liabilities. The
cerning the merger study. Premature comments by the board environmental audit is typically conducted in two stages. In
as to the potential savings, the name of the merged coopera- the first stage, a certified professional determines if there are
tive, the closing of facilities, or potential personnel actions any environmental problems which would warrant a Phase II
could kill an otherwise successful merger. study. If problems are identified, the second phase study
should describe what materials are available and also provide
Step 3-The Calendar of Events
an estimate of the clean-up costs. However, some coopera-
Most cooperatives use a “green light-red light” system in tives proceed with the merger process, contingent upon the
designing a calendar of events. The steering committee clean-up of any minor environmental problems which have
defines a calendar of events for the entire merger process and been identified. If this is the case, it is essential to document
proceeds with each step, provided the results from the previ- what clean-up procedures will be undertaken as well as who
ous step indicate that a merger is feasible and beneficial. will fund the clean-up.
However, if the feedback from any step is unfavorable, the
committee immediately abandons the merger or puts the Step 5-Negotiating the Agreement
merger activities on hold. The calendar of events might The actual merger agreement will reflect the unique
include: situation facing each potential set of merger partners. Your
• Effective date for the merger cooperative’s attorney can assist you in codifying the actual
• Target date for approval contract terms. Specifying the exact terms of a merger or
• Information meetings: membership, employees acquisition brings up a number of difficult issues. These
• Announcements: letters to membership, notification of include combining the equity retirement plans, combining the
meetings board of directors, deciding on a name for the merged
• Tour of facilities by steering committee cooperative, designing a program for unifying operations, and
• Recommendation by steering committee selecting a manager for the merged firm.

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The first step in combining the equity retirement plans is extremely important at this stage. In addition to changes in
for the merger committee to examine both plans. The next specific operating areas, the merger will imply changes in
step is to determine how difficult it would be to convert one credit policy, pricing policy, and numerous other areas of day-
plan into the other. A transition plan must be developed to-day management. It is important to clearly inform the
whenever conversation is possible. If the merger involves a membership of these changes and keep the emphasis on
financially stressed cooperative, the merger partner must member service. The goal should be to communicate to every
determine how the equity will be valued. member that they are important to the cooperative.
The main challenge in combining the board of directors As the organization works through the host of transitional
is in maintaining representation for all of the geographic areas issues related to the merger, it is essential that the opportuni-
and still have a workable number of directors on the board. ties for reorganization, cost savings, and efficiency be aggres-
Typically, a transition plan is established whereby some sively pursued. The combined organization may demand
director positions are eliminated as their terms expire. Just as changes in the management structure. More involved com-
in establishing a personnel plan, it is important that all discus- munication and control procedures may be needed. More
sions focus on the positions and not on the individuals formal and involved decision-making processes may also be
involved. needed. While it is unfortunate that these changes must be
If the merger is to be effective in reducing costs and made at the time when the organization is struggling to cope
maintaining service, a formal plan for unifying operations with the integration of facilities, policies, and personnel; it
must be established. Board members should avoid any does provide an opportunity to improve and upgrade the
premature discussion of the closure of specific facilities. management process. The new organization may also need
However, unless specific goals for the merger are established to revamp its budgetary process and improve its inventory and
and monitored, the potential savings will evaporate. The cash management systems. The final step in a merger is to
board should establish the general direction and strategy of monitor whether the merger achieved the strategic and opera-
the new merged firm. It is up to the manager of the new firm tional objectives and to implement further changes.
to implement specific staffing and operational changes.
When selecting a manager for the merged firm, the board Mistakes to Avoid
should carefully consider communication skills and the ability
to delegate responsibility along with overall management Managers and directors who have been involved in the
capability. A manager who has been effective with a “hands- merger process list mistakes they wish could have been
on” style may not be able to effectively manage a larger avoided:
merged firm. Maintaining communication with the member- • Poor communication with the membership and the
ship and with the employees represents the largest single employees
challenge for the new manager. • Directors’ failure to spend more time defining specific
goals for the merger
Step 6-Member Approval Stage • Announcing prematurely a new name for the organiza-
If the merger is approved by the board, the next step is to tion or the closure of facilities
present the issue to the membership. Communication is one • Letting a deteriorating financial situation force board
of the keys to a successful merger. One manager put this as members into a merger without a thorough study
“take care of the `me’ issues.” Members, customers, and • Over-emphasizing immediate savings and underesti-
employees want to know what the merger will mean to them. mating the problems which will occur during the tran-
Financial and feasibility information can be provided in con- sition.
densed form. Informational mailings and/or informational
meetings are often used at this point. Legal requirements Summary
concerning the notice of meetings and what constitutes a
quorum for a merger vote must be strictly observed. The A merger is, in itself, neither good nor bad. A cooperative
directors of both cooperatives should strongly urge approval should view a potential merger in terms of its overall mission
by the membership through letters and personal appearances to meet members’ needs. The success of a merger depends
at informational meetings. It is important to keep employees upon planning, careful study, and management. Attitudes
informed. Good communication with employees protects toward mergers change as the business environment changes.
productivity. When employees are well advised, the chances Cooperatives which rejected a merger have later become
for a successful merger increase. As a rule, employees involved in successful mergers. Other cooperatives which
handle change much easier than they handle uncertainty. have merged have later split operations. However, according
to a study by the Agricultural Cooperative Service, approxi-
Step 7-Implementing the Reorganization mately 80 percent of cooperative mergers are classified as
successful. The successful mergers tend to make a coopera-
If both memberships approve the merger, the formidable
tive a more potent, competitive factor or halt the decline of one
task of implementing the merger or reorganization occurs.
or more organizations or provide the organization with a base
The manager and directors should start managing the transi-
for future growth.
tion as soon as the deal is announced. Communication is
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Issued in furtherance of Cooperative Extension work, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Samuel E. Curl, Director of Oklahoma Cooperative
Extension Service, Oklahoma State University, Stillwater, Oklahoma. This publication is printed and issued by Oklahoma State University as authorized by the Dean of the Division of Agricultural
Sciences and Natural Resources and has been prepared and distributed at a cost of $ 257.00 for 2,500 copies. #7152 0693 EW.

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