The Decision to Merge: A Case Study of U.S. Dairy Cooperatives
Henehan, Brian M.
A significant number of mergers and unifications have occurred among U.S. agricultural cooperatives over the last ten years. A recent report from USDA, RBS, summarized over 50 unifications of selected U.S. cooperatives of various types that occurred from 1989 through early 1999. Of the fifty-one cases cited, forty percent involved dairy cooperatives. Several recent mergers have resulted in the creation of the largest dairy cooperatives formed in U.S. history, serving members spread out across the country. The increased occurrence and scope of mergers of dairy cooperatives and the resulting impact on dairy farmer-members warrants additional study. A large body of literature and research exists on mergers of publicly-held corporations. Fewer studies have been conducted on the mergers of agricultural cooperatives. Two recent papers identified the need for further research on the impact and expectations associated with agricultural cooperative mergers and acquisitions. A case study approach was used to analyze two U.S. dairy cooperatives which merged in 1995. Economic and management data for the case studies were collected through comprehensive, structured interviews with the board chairs, advisors, and managers directly involved in making the merger decision. Financial statements were reviewed and financial ratio analysis undertaken to measure the economic impact of the merger. The selection of a cooperative merger partner is influenced by previous, long-term relations with a given cooperative. Having leadership open to the possibility of merging combined with previous positive experiences with mergers are key ingredients in considering future merger options. Driving forces identified for motivating mergers in the dairy industry are: consolidation at the retail and processor levels, potential cost savings from consolidated operations and increased uncertainty over the role of government. The greatest potential benefits mentioned were: cost cutting, avoiding destructive competition, higher returns to members, and increased leverage in the marketplace. The greatest barriers to merging were loss of the identity and control by the predecessor cooperative, and individual decision makers unwilling to take the associated risks of merging. Financial ratios were used to measure pre and post-merger performance in the areas of profitability, debt capacity, returns on equity as well as general and administrative expenses. The newly merged cooperative was able to achieve better financial performance than it's predecessor cooperatives in regards to improving profitability, increasing returns on equity and decreasing expenses related to administration and marketing on a per hundred weight of milk marketed.
WP 2002-34 November 2002
Charles H. Dyson School of Applied Economics and Management, Cornell University