Mergers and Acquisitions Among Agricultural Cooperatives: Why

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Mergers and Acquisitions Among Agricultural
Cooperatives Why?

• Timothy Richards and Mark Manfredo
• Morrison School of Agribusiness
• Arizona State University

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Outline

• Brief intro
• Background and literature
• Objectives
• Data
• Methods
• Results
• Reflections

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XYZ Milk Producers Association merges with ABC
Milk Producers Association. The combined
cooperatives would serve more than 1,600 dairy
farmers in 10 states, and market 3.5 billion
pounds of milk each year.
XYZ Milk Producers Assn.
XYZ Milk Producers Assn.
Determinants?

Increased performance of combined firm ?
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Mergers, Acquisitions, Joint Ventures, and
Strategic Alliances 1980 - 1999
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Examples of Coop MA

• MI Sugar joins MidWest Agri-Commodities
• Access to Eastern US market
• Access to European distribution and clients
• US Premium Beef buys Farmland Nat. Beef
• Financial distress of FNB
• Marketing opportunity for USPB as 4th largest

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Examples of Coop MA

• GROWMARK buys Agway ag/seed unit
• Agway in financial distress (Chapter 11)
• GM sees geographic opportunity for brand
• Economies of scale in Agway facilities
• MarVa Milk Producers buys Maola Milk and Ice
  Cream, Co.
• Geographic coverage / brands / value added

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What drives MA?

• Micro or Internal Factors
• Vertical integration avoid double
  marginalization
• Horizontal integration market power?
• Economies of scale / Expansion of Capacity
• Synergies cost reduction and revenue generation
• Market for corporate control (Jarrell et al.
  Jensen 1988)
• Efficiencies unrealized value
• Access to managerial skill Fama and Jensen
• Risk management through pooling risks
• Adoption of new technology

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• Macro or Economy-Wide Factors
• Merger waves periods of high MA activity
• Golbe and White Resende Linn and Zhu
• Macroeconomic drivers
• Mergers of IOF rivals
• Value of IOF equity on stock market
• Growth in GDP
• Level of interest rates
• Often, merger is a strategic imperative

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• Studies seldom examine both micro and macro
  factors
• Cooperatives uniquely capital constrained
  relative to IOFs ?

?
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Post MA Performance?

• Post-merger performance of IOFs - relatively
  easy to measure
• Public access to detailed financial statements
• Observable and available share prices
• Standards for pricing assets
• Literature suggests target firm shareholders
  benefit, but acquiring firm shareholders do not
  (Jensen and Ruback).

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• Post-merger performance of cooperatives
  difficult to measure
• No explicit profit motive
• No publicly traded stock/observable stock price
• No obligation to publicly disclose financial
  information
• Different motivations for MA relative to IOFs
• Similar metrics of managerial performance exist
  between IOFs and coops

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Objectives

• Part I Determinants of MA
• Identify factors influencing the probability of
  mergers, acquisitions, strategic alliances, and
  joint ventures among agricultural cooperatives
• Examine the unique influence of capital
  constraints on the probability of these various
  takeover/collaborative activities occurring

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• Part II Post MA Performance
• Determine if coops that participate in these
  activities perform better financially than those
  that do not
• Assess ability of MA activity to relax unique
  capital constraints of cooperatives

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Data

• Food Institute Mergers and Acquisitions
  Lexis/Nexis
• RBS Top 100
• 1980 to 1998
• Financial ratios
• Coded for confidentiality
• Sector output and input prices
• BLS PPI

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• Macroeconomic factors
• USDA Agricultural Statistics
• U.S. Federal Reserve
• Commodity Systems Incorporated

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Methods

• Determinants of MA Activity
• Stage 1 - Generalized Leontief profit function
• Shadow value of capital capital constraint
  variable
• Stage 2 - Individual binary choice models
  (Probit)
• Prob(y1) f(X, sector dummy variables,
• shadow value of capital)

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• Stage II explanatory variables
• Synergies
• Return on assets
• Sales growth
• Extent of capital constraint
• Current ratio
• Debt-to-assets ratio

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• Macroeconomic influences and merger waves
• GDP growth
• SP 500 growth
• 3 month t-bill rate
• U.S. agricultural output
• Total agribusiness mergers and acquisitions
• Value of cooperatives capital constraint
• Shadow value of capital estimated from stage 1

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Probit Model Estimates of Cooperative Mergers
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Probit Model Estimates of Cooperative
Acquisitions
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Probit Model Estimates of Strategic Alliances
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Probit Model Estimates of Joint Ventures
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Probit Model of Combination Activity
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Post-Merger Performance

• Stage 1 - Generalized Leontief profit function
• Stage 2 - Individual binary choice models
  (Probit)
• Prob(y1) f(X, sectors, value of capital)
• Stage 3 Profitability and sales growth
• ROA Sales Growth f(X, MA)

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2SLS Model of Coop Post-Merger Performance ROA
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2SLS Model of Coop Post-Merger Performance Sales
Growth
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Important Findings

• Several factors influence the probability of
  combinatorial activity
• Hypothesis regarding capital constraints is
  strongly supported
• positive influence across models
• strong marginal impacts

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• Macroeconomic influences
• value of agricultural output
• interest rates
• SP 500
• Financial performance
• fast-growing, efficient, and highly leveraged

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• MA activity and financial performance are
  jointly endogenous
• Tradeoffs improvement in profitability / slower
  sales growth
• MA reduces capital constraint, allowing greater
  profitability
• Finding inconsistent with IOF literature
• Sales growth negative impact from MA
• Macro/industry factors temporary cut-backs in
  sales efforts decrease in membership?

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Implications

• Consolidation among fast growing, efficient
  cooperatives is positive development
• Need to remain competitive with IOF rivals
• Economies of scale vs. market power
• Supporting cooperative consolidation better for
  the agricultural economy as a whole

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• Skeptics should be aware of potential benefits
• Capital constraints create barrier to internal
  growth thus driving consolidation
• Is MA the least cost alternative?
• Policies for making equity financing or other
  financing alternatives more attractive to
  cooperatives

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• Anti-trust
• Viewed in context of cooperatives true
  competition

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Summary Statistics
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