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Merging
Agricultural
Cooperative
Service
Cooperatives
ACS
Research Report Planning, Negotiating, Implementing
Number 43
Abstract

MERGING COOPERATIVES: PLANNING, NEGOTIATING,

IMPLEMENTING

Bruce L. Swanson
Program Leader - Management and Operations
Cooperative Management Division
Agricultural Cooperative Service
U.S. Department of Agriculture

(GUidelines for reorganization of cooperatives through merger,

acquisition, or consolidation are provided. Planning, negotiating, and
implementing phases of reorganization are covered. Items from actual
combinations of cooperatives are reported as they relate to phases of
the reorganization process.]

Key words: Cooperatives, reorganization, merger, consolidation,

acquisition, negotiation.

Research Report 43
January 1985
 Preface

Cooperatives reorganize most frequently by means of merger,

acquisition, or consolidation. No matter which method is selected, a
three-phase process- planning, negotiating, and implementing-is
required for the formation. This report contains guidelines and related
details for these stages. It also offers data from actual merger
experiences.
The number of cooperative reorganizations occurring each year
and the amounts of sales and assets they represent are considerable.
The impact these reorganizations have on members, employees, and
communities suggests that cooperative officials plan such moves
with care. Analysts, both within cooperatives and in outside
consulting organizations, participate in reorganization feasibility
studies and prepare guidelines for these activities. This report has
been compiled for these purposes as well as to update and add to
previous ACS work in this area. i II

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .al!. . . . . .~

contents

HIGHLIGHTS AND CONCLUSIONS iv

PLANNING FOR REORGANIZATION 2

Introducing the Idea of Merging 4
Initial Appraisal of Possibilities 4
Formal Studies of Ecol)omic Feasibility 5

I NEGOTIATING THE REORGANIZATION AGREEMENT .

Policies of the Negotiating Committee ............. .
6
8
I Organizational and Operational Guidelines ........ . 9

I Legal and Financial Requirements ................. .

Bringing the Proposal to Vote ...................... .
12
14

IMPLEMENTING THE REORGANIZED ASSOCIATION .. 16

Synergy ............................................. . 19
Organizational Areas ............................... . 20
Support Activities .................................. . 21
Operating Sectors .................................. . 25

OBSERVATIONS FROM REORGANIZED COOPERATIVES 27

Con sid enng
. Reorganlza
. t'Ion ............................ . 29
Evaluating and Planning the Combination ............. . 30
Managing the Co mb'In ed 0 rganlza
. t'Ion ................. . 33
Results of Combining ................................... . 35

REFERENCES 38

RELATED READINGS .................................... 39

l iii
Highlights and Conclusions

'\
Reorganization through merger, a!cquisition, or consolidation.
the usual methods-involves a three-phase process. The initial st
is planning, which covers external factors that may come into pla~
and considerations relating to the internal workings of the propose
combination. An economic feasibility study is normally undertaker
during this phase, followed by negotiations among the parties.
Approval or disapproval of the merger agreement by the boards ani
memberships of the associations completes the negotiation stage:
The final phase is implementation, which involves solving the
problems that arise when plant and personnel are combined. Geart.
up the new organization for smooth operation also occurs during tli
phase.
"People" considerations take priority throughout the
reorganization process. Directors, employees, members and other~
patrons, and community leaders and ordinary citizens, all have a !,
stake when the structure and operation of a cooperative is ~n,~nl]_
Aggressive management decision making, for example, may be
critical in providing the momentum necessary to carry out the
reorganization. But this may be blunted if management itself is
subject to possible changes in its own makeup. Such situations
questions of how management can best function decisively,
informatively, and with a minimum of disruption during reorgan
Certain decisions may have to be made during negotiations to
prevent problems following formal reor'Qanization. These include:
1. Designating size of the consolidated board of directors and
setting new district boundaries, if necessary.

iv
 2. Reassigning managers and redesignating their tasks.
3. Closing or consolidating facilities.
4. Altering operating plans or procedures.
5. Changing financial structure or policies.
6. Reducing number of employees.
7. Developing a member relations strategy to maintain
reorganization approval.
Reorganized associations are usually able to join major
organizational areas and operating activities within a year. The
majority require less than 6 months and only occasionally is more
than 12 months required. The longer period is usually required for
plant consolidation or elimination. Or it may be required for settling an
issue that should have been negotiated earlier.
Associations reorganizing successfully often change in a number
01 ways:
1. They become a stronger competitive factor in the marketplace
and strengthen their bargaining ability in product, supply, or financial
markets.
2. They are able to halt the decline of one or more of the merged
organizations.
3. They can provide favorable growth prospects because of a
stronger operating and financial base.
Most associations consider communications vital to a
successsful merger. Providing feedback from members and
employees to management is viewed as essential to the success of
the reorganization.

I:

v
Merging Cooperatives:
Planning, Negotiating,
Implementing

Bruce L. Swanson 1

Cooperatives, as with noncooperative firms, reorganize most often by

merging, acquiring, or consolidating. 2 Other methods, such as forming
holding companies and certain leasing arrangements, are also employed.

Reorganization is undertaken for a number of reasons. It can prevent

financial collapse and provide stronger supervisory talent. Product or
geographic diversification can be extended and economies of scale realized.
Reorganization also can improve control of supply and marketing channels.

Cooperative reorganizations each year cut across most commodity or supply

areas and involve sizeable amounts of sales and assets. Associations are
often uncertain when initiating and carrying out such action. This report
provides background material and guidelines that should be of assistance. It
updates and expands on previous information about cooperative
reorganizations and mergers.

Cooperative mergers involve a wide range of organizational sizes and

structures. A variety of methods are used to restructure, and associations
offer many reasons for their reorganization decisions. As a result, this
report will be generalized so it can be kept to a manageable size.

An attempt has been made, however, to enhance the general nature of the
material presented. This is done by including observations from cooperative
officials knowledgeable about reorganization activity.

IProg ram Leader, Management and Operations.

2Merger, acquisition, and consolidation are often used interchangeably. In fact,

however, the terms refer to different types of joining. Merger involves combining the
net assets of two or more firms, with one surviving. When two or more firms
Consolidate, their net assets are transferred to a new firm organized for this purpose.
AcquiSition results in control of a purchased business. The acquired organization may
SurvIve or be absorbed.
 ,l
"
PLANNING FOR R E O R G A N I Z A T I O N ' "1
J
Three types of planning must be considered when preparing to reorganiZ~"
The first is long-range planning. Here, the results of the fit, interaction, '
probable results of combining organizations are considered over an
extended term. Short-term planning provides for blending and smoothing,
the combination of facilities and personnel brought together in the joint J
organization. Included would be provisions for innovative management ~
initiatives that bring recognition to the new cooperative's identity, stimula~
business aggressiveness, aid employee enthusiasm, and increase member J,','

patronage. An additional planning phase has a somewhat different ~

emphasis. It is concerned mainly with carrying out the immediate steps ;1
involved in joining two or more associations. .~
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The longer range effects of reorganizing are often given minor attention. '1
However, as indicated in another study: .~
,:1
'~

" ... the long-range plan which defines how a company will utilize its '1
resources to achieve objectives should specify the contribution of
merger/acquisition to the overall plan. Establishing company objectives,!
evaluating resources, and making a long-range plan are fundamental to thei
consideration of merger and acquisition - by both the acquiring company 11
and the acquired." [I]3

Another study makes essentially the same point but from a broader view: '~
" ... a potential acquisition must be looked at as a long-range investment and!
in the widest possible perspective. The economic conditions of a company's)
industry and its prospects are as important as the particular details of its '
operation." [2]

Strategic and tactical considerations both must be included in long-range

planning. The strategic, or broader, view includes comparisons of external
and internal growth possibilities. External growth occurs through
reorganization with other firms while internal growth involves expansion of'
current activities or adoption of new functions.

In the external category, associations are likely to consider the long-term

implications of joining with other organizations by means of merging,
acquiring, or consolidating. Merger formation is the predominant type of
reorganization among cooperatives. While use of this method probably has
more tendency to result in problems during the joining process, less burden

3Italicized numbers in parentheses refer to the references at the end of this report.

2
is placed on the financial resources of the acquiring component and its
dominant position is likely to be maintained in the combined organization.
Acquisition-type formations require that greater financial resources be
available to the acquiring organizations but are likely to result in fewer
problems during combination. Consolidations join components into
completely new organizations and tend to be large-scale formations
involving several firms scattered widely geographically. The ability to more
easily adopt new organizational and operating policies and procedures is a
particular benefit of consolida~on formations. The full range of options and
even modification of the usual methods should always be considered when
planning for reorganization. Acquisition or consolidation arrangements or
their modifications might be adopted to eliminate many of the problems
connected with the more usual merger method. They might also allow more
flexible arrangements in providing ajoint operation satisfactory to all of the
combining components. Discounted cash flow analyses are useful to
compare the potential of various external and internal growth strategies.

Tactical decisions, which are narrower in scope, can involve four

possibilities: (1) Expanding existing markets with commodities or supplies
currently handled, (2) finding new markets for commodities or supplies
currently handled, (3) handling new commodities or supplies in order to
better satisfy demand of existing markets, or (4) handling new
commodities or supplies for new markets.

The strategic-tactical position adopted will be developed according to a

formal set of business goals. These usually include one or more of the
following: Expanding commodity or supply lines, better utilizing production
capacity, increasing market share, attaining a minimum size needed for
obtaining adequate financial resources, or fully developing potential
marketing capabilities, contacts, or channels. Unification goals may also be
aimed at, among other things, acquiring goodwill, prestige, or brand names,
offsetting technological obsoiescence of facilities, utilizing waste or
bYProducts, or capitalizing on distinctive managerial talents.

Dividing plans into immediate, short-term, and long-term time phases may
cause problems due to duplication and overlap. But the technique does
permit development of the sequence in which various happenings of the
combination are expected to occur. This will help determine when and
where payoffs from the reorganization may be expected. The boundary
between immediate and short-term planning needs has a particular
tendency to blur. Immediate planning utilizes various legal, financial, and
administrative techniques, frequently of a highly mechanical nature.
Conversely, short-term planning requires innovative management.

3
 Plans can be made prior to a reorganization for the acquired organization
remain active in some form or for some or all of its management personn
to be retained. This can often have a very positive influence if not .~
outweighed by a basic lack of strength of the acquisition. While such plan4
may not be directly communicated beforehand to personnel of the ,
organization to be acquired, indirect signals may be given. In view ofits ~
impact, it is important that this factor be given some attention in the
planning process.

Introducing the Idea of Merging

Faltering business results involving slow or negative growth over a period

several years often initiate thoughts ofreorganization. But even with .;j
normal expansion, it is not uncommon for management to reorganize as a ~
means of gaining advantage. The suggestion may be provided by the boardi~
of directors. Or a trade, lobby, or similar group may provide information on~
the availability of an organization falling under its service umbrella. It can .1
be based on outstanding positive characteristics of the reorganization Ii
prospect or favorable cost-benefit features when matched against proposed)l
internal expansion. The reorganization idea may also be introduced by a .
necessity to acquire new technology, management, markets, production
inputs, or additional financial resources.

Although usually conceived or considered in a business setting, some

reorganization proposals may originate in situations outside the business
arena. No matter where they arise, leadership of the associations involved
must be alert for their appearance. The appraisal methods used should be
flexible enough to consider proposals arising under a variety of conditions.

Initial Appraisal of Possibilities

A committee from the board of directors, management, or both, is usually

formed by each organization considering a merger. Their task is to
determine whether a reorganization proposal should be carried forward to
the formal evaluation stage.

Some research has suggested that the committee from the acquiring
organization develop criteria describing the qualifications required of firms
to be considered for merged3] The belief was that this procedure would
enable systematic evaluation oflarge numbers of prospects. While this
procedure may appeal to associations with particularly rigid requirements, it
may also cause outstanding prospects to be overlooked.

4
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The idea of reorganization initially generates excitement. But this can
disappear rapidly as the problems and difficulties connected with it come
into clearer focus. To begin the appraisal, the committees should prepare
statements indicating the purpose and goals of the merger. The analyses,
consultations, and documentation required to evaluate and support
reorganization can involve much time and expense. Steps should be taken
at the outset to abort the plan if the likelihood of success seems
questionable.

Determination by the committees ~fthe possibility of bringing a

combination of organizations into being is difficult. It will often depend
more on correctly reading the negative factors at play. Particularly important
are the management and directors opposing the move. Measuring the
strength of their opposition is possibly the key in determining if a combined
organization can be formed. Unfortunately, inflexible positions are often
adopted at the outset, and are usually based on selfishness, self-protection,
ego gratification, or just outright obstinacy. If this is the case, the smart
move may be to direct resources toward internal growth. Another
alternative would be to wait for a while to see if the reorganization climate
changes.

Formal Studies of Economic Feasibility

If conditions are right for a merger, the next step for the committees is to
sort out its basic strengths and weaknesses. Studies may be conducted by
outside consultants or by analysts within the organizations. Appraisals of
III
legal problems, financial structures, and accounting systems follow.
~: I
III
II'
For large and complex reorganizations, more than one economic feasibility
study should be considered. Although feasibility studies are expensive, the
cost is justified if a reorganization effort with questionable benefits can be
untracked before it reaches the stages where it is difficult to reverse. On the
other hand, the studies can help revive interest in a reorganization effort
that is stumbling because its benefits have not been fully defined.

The format of the economic feasibility study will vary among consultants.
At a minimum, it should cover the following areas and include all of the
organizations involved:

(a) Characteristics of the market served.

(b) Products handled and services provided.
(c) Market share-current and potential.

5
 :1

(d) Organizational structure and features. .~

(e) Operating facilities and capacities utilized. ';
(f) Financial features (including analysis of joint financial statements and';)
cash flow projections). ~

(g) Estimated savings by eliminating duplication.

(h) Advantages and disadvantages of combining.
(i) Alternative courses of action and recommendations.

A particularly sensitive area involves the savings offered by eliminating

duplicate facilities, equipment, functions, and excess personnel. Since
changes will affect the livelihoods of people and communities, it is
necessary to develop them with considerable care.

Each participant in a reorganization appraisal must be willing to openly

honestly disclose all data requested. If any problems are anticipated, a
legally binding document guaranteeing release of all information should
negotitated before the analysis gets underway. This step may upset some
due to the risk in releasing information in situations where the merger
not go through. But the risk is no greater than the losses that might be
sustained if the merger went forward based on incomplete information.

Legal and financial counselors should approve the economic analysis

it is presented to the boards. Without getting into a detailed study of the
legal and financial requirements that will be necessary later, they should
able to point out major stumbling blocks, ifthere are any.

When initiaily considered, reorganization should not be evaluated in

isolation. Along with the adv~ntages and disadvantages of an external
growth strategy, the associ at on should also consider those that may
by concentrating on internal growth. The process is illustrated in figure 1.

NEGOTIATING THE REORGANIZATION AGREEMENT

When directors of the firms considering reorganization are convinced that:

the move is justified economically, the stage is set for negotiations.
Members of the initial steering committees will usually be appointed to a
joint negotiating committee. This follows from their familiarity with the
detail and complexities of the reorganization proposal up to this point.
Certain board members or management personnel outside of this group
may, however, have outstanding qualities that would allow them to

6
r
Fig. 1-Planning For Reorganization
Steering committee appointed from
directors and management.

I
Sets goals for association. Considers
ways to meet them. Thinks about
long-term prospects.

Evaluates internal growth possibilities. Evaluates external growth

possibilities. I
II
!liI
',\,i
I '1':,
Considers change in current activities Identifies possible merger candidates. , I'::
or addition of new activities. Assesses their interest in a feasibility
study.
:,1'
1 I ,I'"',I
Identifies advantages and Arranges for feasibility study to be ! I!,'I'!
disadvantages. conducted. Study specifies I,ll

advantages and disadvantages of

joining.

I
Legal and financial advisors review
study indicating any apparent barriers
to joining.

I
Report of study and other
recommendations presented to
boards of directors.

r
I
Board of directors evaluates
advantages and disadvantages of
adopting internal or external growth
strategy or remaining in present
mode. Decides on course to follow.

T
If external growth is selected,
negotiations with potential joiner(s)
begin. Immediate and Short-range
plans for implementing possible
reorganization begin to be developed.
7
participate with unusual effectiveness in negotiations. They can be
appointed in addition to-or in place of-the original committee members.;

The chairman should be appointed who can arrange for reasonable and
workable concessions, arbitrate necessary decisions, provide judgments,
and generally keep the process on track. It could well be someone from the:
outside whose interests are completely independent of the organizations ;
involved. While he or she has no voting power, the chairman must, insofar
as possible, enjoy the confidence and respect of all parties.

The work of the negotiating committee usually involves the following:

(a) Establishes policies indicating how the committee will function.

(b) Provides organizational and operational guidelines for the combining

associations.

(c) Points out requirements in the legal and financial areas.

(d) Presents the negotiated agreement to the boards of directors for

acceptance or rejection.
'~
,1
Policies of the Negotiating Committee ij
Some general policies should be in place for all reorganization committee 1
activity. These call for agreement on a record of the meetings, on releasing ,r~
information on the status of reorganization proceedings, and on settlement.~
of disputes. They also cover confidentiality of records, selection of "
professional assistance, and allocation of meeting expenses among the
associations.

Record of Meetings Detailed minutes must be kept of all negotiation

proceedings. They must capture all detail to enable committee members to
review the discussion taking place and the motions entered. Since
negotiating responsibilities are sometimes completely new to committee
members, opportunities to reconsider various materials presented will be of
considerable importance. The recording secretary should also be an
outsider, whose appointment is the responsibility of the committee
chairman.

Release of Information While it may be possible to keep reorganization

information confidential prior to negotiation, leaks usually develop once
they begin. Both public and member relations programs should be in place

8
to counter negative reaction to the discussions. The programs should keep
members, employees, and the community informed of the purpose of the
merger talks and their progress. The necessity for continued open-minded
study to determine all aspects of the proposal should be stressed.

Settlement of Disputes Problems whose solutions are not immediately

apparent usually will develop during negotiation proceedings. Putting these
aside temporarily while proceeding with other business can be risky.
Removing roadblocks as they develop often proves to be the better, and less
expensive, course. This may require that the chairman act to settle
disagreements.

Data Disclosure Complete disclosure of all data is even more essential

for negotiating sessions than for the economic feasibility study. If items
were held back earlier, it is extremely important that they be released while
negotiations are still in progress. This can permit the affected firms to drop
out before more serious legal action is considered necessary. And it would
lessen the expense involved if the process continued to string out. As it was
earlier, the information furnished must remain confidential.

Input of Professional Advisers A reorganization requires legal and

financial expertise. It may also need special assistance in engineering,
marketing, accounting, and other areas. Advisers in these fields will
sometimes playa more dominant role in negotiation proceedings than
should be allowed. This occurs either through their own aggressiveness or
because of the desire of negotiating committee members to be led.
Members of the committee should dominate in the negotiating process.
Advisers' participation should be restricted to preplanned sessions where
their expertise is required.

Allocating Committee Expenses Expenses of the negotiating

committee will become part of the cost of reorganization if negotiations are
successful. The burden is usually shared equally by each firm when
negotiations are not successful. However, if firms are of considerably
different size it may be appropriate to share on the basis of sales volume or
equivalent measure.

Organizational and Operational Guidelines

In planning the organizational and operating structure of the new

association, the negotiating committee must decide whether to adopt old
policies or discard them and come up with something new. The committee
must also recognize the boundary between its own responsibilities for policy

9
 aq

formation and the responsibilities of incoming management for program

decisions. It is also necessary that the board of directors of the new
association have some leeway to establish guidelines. This should be
considered when the committee is making policy decisions.

Policy matters that can properly be considered by the negotiating commi~

will include:

(I) Defining the objectives of the combined association.

(2) Developing a program for unifying operations.

(3) Combining the boards of directors.
(4) Selecting management and defining its responsibility.
(5) Selecting the name of the new organization.

Objectives of the New Association Specifying the overall goals andl

philosophy of the new organization is a task often postponed in favor of J
those that can be more easily accomplished. A statement of the basic
objectives, however, will help the organization get a strong start. And it.
even more important if the objectives differ markedly from those of the .~
previous associations. The objectives should cover the type of business, ~
products, services, locations to be served, the customer base, and similal';~
broad areas of interest. The objectives drawn up will usually be refined b
legal counsel and be made a part of the bylaws.

Program for Unifying Operations Determining which facilities are

be closed or downgraded when firms are combined and which functions
to be eliminated or changed is a delicate task. While the textbook soluti
may call for economic reasoning, organizational politics and strong-will
personalities often enter into the picture. Concessions may be required
block some features of the reorganization as originally planned. They
should not be damaging enough to discontinue, however. The negotiat'
committee must maintain a diplomatic course that preserves the ability
implement most of the important changes required over the long term.
the same time, it must find ways to minimize damages of carrying ex
baggage over the near term. In any case, a timetable must be developed .
give members, employees, and affected communities ample time to ad
changes. Outside pressures to make changes to the timetable should ber
strongly discouraged once it has been established to the satisfaction of
negotiating parties.

10
Combining Boards of Directors The manner in which directors are to
be combined is also a touchy problem. The prestige and authority of their
positions, along with any monetary benefits involved, make many directors
reluctant to leave before their term expires. A consolidated board composed
of most or all directors of the firms combining may be too large to function
efficiently. The negotiating committee is thus faced with the decision of
reducing board size or stumbling along with a large consolidated board for a
while. When the latter course i~ selected, attrition will hopefully take care of
the surplus.

Offsetting measures can be used also to blunt problems connected with

excess directors. Initial or expanded use of committees, particularly an
executive committee, can be put in place. This will enable a core group of
selected directors to be responsible for most of the important
decisionmaking. If this strategy is used, the negotiating committee will have
to assure that the executive committee is fairly represented by each joining
organization. Decisions of the executive committee will also have to be
voted on by the full board before they can be implemented.

If board size is to change immediately, the negotiating committee will have

to decide who and how many directors will be on it, and whether districting
should be based on membership number or business volume.
Unfortunately, few definitive rules are available to aid in making these
judgments. Board structure used successfully in the past would certainly be
a good starting point for discussion. The primary guideline is that any
decisions fairly reflect the best interests of the combined membership.

Selecting Management The negotiating committee should leave

management selection to the new board of directors. Selection should be
handled in such a way that the managements of all combining associations
have a reasonable chance of being appointed to the positions available.
After the initial management team is put together and given an opportunity
to prove itself, future selection of management personnel should be the
exclusive responsibility of the general manager. As much freedom as
Possible should be given the general manager in developing the type of
~anagement ~r?~p he/she feels is necessary. Organization charts showing
e proposed millal management structure of the new association should be
COnstructed. Formal job descriptions for individual directors and managers
?,~~t be prepared. Both will be helpful to the negotiating committee and the
initial board of directors.

Agreeing on the Association's Name Selection of a name for the new

organization often involves extraordinary tugging and pulling before

11
agreement is reached. Organizational pride will cause some reluctance to
change. Associations are concerned that if their name is left out of the new'
title, it indicates that they were weak and were "taken over." A name
change can also involve considerable expense for new displays, signs, and"
other advertising and promotional items. There is usually no problem wh
a larger firm consolidates with a considerably smaller one. The identity of';
the larger organization is often taken by the overall firm. However, when
more equal size firms combine and a name change cannot be agreed upon f
quickly, the easiest solution may be to adopt a completely new name. This ~.
new identification, although costly, can help the organization get off to a
good start. If promoted correctly, it can improve the association's image in
both old and new markets.

Legal and Financial Requirements

"

Professional counselors are responsible for getting the negotiating parties tol
agree on legal and financial matters. Selection of a lawyer and a financial
adviser with the necessary credentials are critical tasks and should be made
at the beginning of the negotiating process. As cautioned earlier, their
counsel must not evolve into the dominating feature of the negotiation
process.

Among the more important areas requiring legal and financial advice are:

(I) Appraisal of assets and liabilities.

(2) Type oflegal and financial organization to be formed.
(3) Estimated costs of reorganizing.
(4) Writing the bylaws.
(5) Miscellaneous legal matters.

Appraising Assets and liabilities Problems may develop when the

assets, liabilities, and member capital of combining associations are
appraised. Assets are usually valued as they would be if the consolidating
organizations continued to operate independently. In some cases,
liquidation value, collateral value, or other valuation basis may be used. ~~
Unless immediate disposal of assets of one or both associations is J
contemplated, book values are generally selected. However, when the '. ~
joining organizations differ considerably in such areas as depreciation rates;;l
debt writeoff, salvage valuation, or.properties of windfall poten~ial, some .. "
procedure other than book value w!ll have to be used. In these Instances, It::}
may be necessary to employ an independent appraiser. ~

12 :~
J
 Differences in long-term debt burden can also be a problem for combining
associations. Different financing arrangements and carrying charges can
come into play in determining if the joiners can share the burden fairly. In
the event the debt load is similar, it can be consolidated and restructured in
a mutually agreeable manner. In the more difficult situations, one of the
associations might have to dispose of some facilities to reduce its debt load.
Capacity of remaining assets might be stretched for the combined
association if this occurred. It may be necessary, therefore, that the
negotiating committee take the long view. This would involve letting equal
treatment of debts slide somewhat so the new organization doesn't trap
itself. Such a situation might occur if more expensive new facilities or
equipment were required in a short time merely to replace those sold so that
debt loads brought into the new association were equal.

Forming the Legal and Financial Structure The legal structure of the
combined organization must meet the requirements of various Federal,
State, and local statutes, and the charters of the joining associations. It must
be designed in accord with the unification method selected-merger,
acquisition, or consolidation. Each reorganization is unique and requires the
expertise of legal counsel in laying out its framework. The large number of
merger provisions in the various State statutes alone (see reference [4]) will
give some idea of why each combination tends to be unique. Therefore,
legal and financial experts will have to assist in designing the appropriate
system. Revolving capital programs are part of most cooperatives' financial
structure, and are often a source of difficulty in attempting to combine
organizations. Difficulties in consolidating revolving funds are increased by
differences in equity held per unit of volume as well as differing payments
that may be made on the funds. When there is little variation in these
factors, the former revolving programs can be incorporated into a new one
with only minor modifications. It will include the equities of the joining
organizations and the scheduling arrangement formerly used. When a new
program is necessary, it may be best to combine all outstanding years of
revolving funds at the time of merger. A proportionate share can then be
revolved each year, regardless of the original date, until the discrepancy is
eliminated. The new organization may also borrow funds or sell assets to
shorten the longer revolving fund to match the oldest year of the younger
fund.

Costs of Reorganizing Costs associated directly with merger action

should be estimated early as possible. These costs are often higher than first
eXpected so a liberal estimating procedure should be used. Costs of merging
are usually assumed by the new association as one of its first year's
Operating expenses.

13
Bylaws Preparation Preparing bylaws is usually the task oflegal coun
hired specifically for the purpose. Legal representatives involved in the
negotiating process may also be used. The negotiating committee works
closely with counsel to ensure that the bylaws represent agreed-upon ar

The bylaws will include formalization of all agreements made concerning'.

directors, management, place of business, financial structure, membersh.
and similar matters.

Miscellaneous Legal Matters Among the areas that will require

particular attention of legal counsel are Federal income tax laws and ruli
and Federal antitrust laws and regulations. Legal assistance may also be
needed to negotiate with dissidents who are opposed to the reorganizatio
'.

Bringing the Proposal to Vote ]

When a reorganization agreement has been reached, it will be presented rc4
approval to the directors of all associations involved. The boards or their .~
representatives will usually meet with the negotiating committee several .~
times to develop at least some aspects of the agreement. Therefore, their ·1
sentiments can usually be sensed by the time the agreement is ready for
.1,
approval. If their negative feelings seem strong enough to offer the
possibility of derailing the agreement, the negotiating committee may be
>;
able to sweeten some of its provisions. Concessions can be offered in one
area to offset negative feelings in another area. The usual practice is for th.r
negotiating committee to continue modifying and adjusting the agreemen(1
until approval is reached.

The directors will indicate acceptance of the reorganization agreement by

formal board resolutions. Approval by at least two-thirds of the voting
membership of each joining association is usually required for final
endorsement. To strengthen the probability of a favorable vote, an
intensive publicity, communications, and member- and public-relations
effort is recommended.

Research at Pennsylvania State University supports the importance of

cooperatives mounting a strong communications effort with their
membership. [5] This program may be crucial in winning approval not onh
of the merger effort underway but future reorganization proposals as well.

While only a limited number of reorganized associations were involved in

the study, some of the findings are applicable elsewhere:

14
(I) Members who support a merger do so primarily on the basis of economic
reasons. Those who oppose it do so for reasons which are not primarily
economic.

(2) Members who favor a merger are much more active in their support
than those who oppose it are active in their opposition.

(3) Members who are undecided and indifferent toward a merger appear to
use the services of the cooperative but have little interest in it otherwise.
,
(4) Members who oppose a merger use the services of the reorganized
cooperative almost the same as members who supported the merger.

(5) Members who support a merger are, on average, larger farmers,

younger, and have more formal education than those who oppose or are
undecided. In addition, they belong to more cooperatives and are stronger
proponents of the cooperative philosophy. Those who are undecided earn a
higher percentage of their income off the farm than do the other two
member groups.

(6) When economic gains and member control are both perceived to be
high, a large percentage of members favor the merger. When both are
perceived to be low, very few members favor it. When one is high and the
other low, the members are quite divided in their support.

(7) If a cooperative member opposes one merger, he is likely to oppose

other mergers even if the first merger proves to be successful.

(8) The success of one merger may discourage further cooperative growth
via merger. Many members who support an early merger but oppose a later
merger are satisfied with the situation as is. They believe that further
mergers would jeopardize the quality of the cooperative as well as individual
member control. It appears that this group constitutes the most effective
oPposition bloc. They have expressed much more interest in cooperative
affairs than those who oppose all merger effort. They also express reasons
for opposition that are more substantial than those offered by the
thoroughly anti merger members. Thus, success of future cooperative
mergers may depend upon the ability of management to convince these
members that gains are forthcoming. It will also depend upon blocking the
efforts of members who will oppose merger proposals regardless of their net
benefit.

Major steps in negotiating and ratifying formation of a reorganized

15
cooperative are presented in figure 2. It is particularly important during
phase that areas be noted in which particular difficulties are likely if
decisions lag until after the reorganization. The last section of this report,
covering experiences of cooperatives that have undergone reorganization,
indicates several areas that may require early decisionmaking. Others will
likely become apparent during each particular reorganization negotiation.

IMPLEMENTING THE REORGANIZED ASSOCIATION

Combining operations of two or more organizations that may have been

competitors can be troublesome and frustrating. Because cooperatives are
member owned, they sometimes undergo additional stress because their
members are more actively involved than they would be as mere corporate
shareholders. As with most other business activity, appropriate and
adequate planning, decisionmaking, and implementation can do much to
lessen the strain.

Actual reorganization-as with planning and negotiation-involves a

number of actions. A blend of conventional and unusual techniques must
be used. While a number of features of each reorganization is common
among all, unique details characterize each combination. This also pertains.
to associations that have gone through more than one reorganization. .
Management and directors may have developed experience through an
earlier reorganization, but they can still be uncertain as to how the new
organization should proceed. Therefore, professional consultation may be
as important in implementing as it was in engineering the combination.
even with professional help, it is possible that some costly mistakes will be
made.

A deadline for getting the organization up to operating standards must be

set immediately after reorganization. Tasks must be identified and studied
to determine how they can be most efficiently accomplished. Goals should
then be established that allow reasonable time to perform the most
demanding ones.

People-oriented areas of the business should receive considerable priority

when preparations are made for getting the combined association
This would include the membership, board of directors, employees, and
general public. Drawing lines of communication, circulating plans and
programs, and enlisting and encouraging support for the new association
of primary importance.

16
 Fig. 2-Negotiating and Ratifying the Reorganization Agreement

Joint negotiating committee formed Presents negotiated reorganization

from steering committees of agreement to boards of directors for
organizations considering joining. their consideration. Modifies it, if
~
necessary.

I I
Appoints chairman and secretary- Directors vote to accept or reject
may be outsiders. agreement. If accepted, formal
resolutions are drawn up by each
board involved.

I I
Establishes policies that committee Public-, employee-, and member
will abide by. relations programs are mounted to
promote reorganization effort.

I I
Organizational and operating Development of immediate- and
gUidelines set under which new Short-range plans for reorganization
association will function. implementation is intensified.

I L
Professional counselors appointed to Members \/ote on joining. If approved,
help negotiating parties agree on implementation begins.
legal and financial matters.

I
Attempts to identify and resolve any
ISsues that would be particularly
difficult to agree on after
reorganization occurs.

L 17
A strong personnel program is particularly necessary. Previous
must be spotted in positions where they can make the greatest contri

Well-qualified outsiders must be hired when candidates from within are

available. Employees whose talents are no longer required must be
tactfully and with satisfactory amounts of compensation. Any
in payor benefit scales that exist among the organizations must be IOJII" ...." _
quickly. And, generally, an atmosphere must be established in which
employees feel they have a future and a chance to progress.

The enlarged association may demand a management structure

considerably different from any of its predecessors. This has both
and positive features. The negative side is that additional change is
upon the new association at a time when it must deal with all of the
changes in facilities, personnel, and processes necessary to begin
functioning. But it is positive from the standpoint that management
upgrading will probably occur sooner. Any pockets of weak mamagelmenl
can be removed and, at the same time, greater management "1-'<;"'OL11£.""'"
may help to overcome problems connected with maintaining
previous status. The need in the larger organization for specialists and
approaches in the solution of problems will lead to a more complex
decisionmaking system. More involved communication and control
procedures will be required. Improved monitoring of the entire
management process resulting should strengthen operations "VJIl""U"'''.,.

Providing for the needs of members is what the cooperative must

to emphasize. As the combined association is put in place, the situation
must be tracked carefully to assure that there is no reduction in service
patrons. The competition may be ready to capitalize on any problems
between the new organization and its customers. Adequate"
of the membership prior to actual combination will do much to lessen
concerns in this area. But additional emphasis on maintaining levels of
patronage must take place immediately after the merger.

While problems in the employee and membership areas have first

those in the operational and financial sectors are not far behind. Use
production processes and equipment, and facility consolidation or
rearrangement, often require considerable adjustments. In the
area, the new association may revamp its budgetary structure and
expanded lender base. It may also put more emphasis on cash
and inventory control systems and place more importance on
the cost of borrowed funding for the various enterprises.

18
Synergy
The financial area is often a prime synergy source (synergy exists when the
net returns from a combined organization are greater than the total of those
that would be expected if its joining components stayed single). A combined
organization may be viewed as less risky in the marketplace, leading to
increased availability offunds, more favorable lending rates, or both. Better
cash flow management is likely through adoption of upgraded systems. Use
of more sophisticated accounting systems will enable the new organization
to adopt better methods of planning and control. The savings attained by
these methods will likely override the costs of the new accounting
procedures. Centralization, and initial or expanded computerization, of
accounting tasks can result in substantial savings in clerical expenditure. It
can improve the timeliness of data analyzed, the latter being particularly
important since the information is useful as a decision making tool in many
areas of the organization. Initial accounting statements after reorganization
are critical for management. They can indicate how the new organization is
adapting and progressing, and will be able to make necessary changes.

The marketing and administrative areas also have early synergistic

potential. Near term, the new association should be able to unify advertising
and utilize the strength of individual product lines to upgrade the overall
marketing effort. It should also be able to increase the economies available
through consolidated transportation, warehousing, and sales efforts. In the
administrative area, elimination of duplication in personnel and accounting
departments and reductions in legal representation and consulting needs
can be carried out quickly. Management may become more specialized and
be afforded new opportunities by the greater resources.

In the production area, synergistic effects may be possible but often only
Overthe long term. Plant closures, construction of new facilities, changes in
production processes,joining operations of the combining cooperatives,
and adjusting for differences in the quality and experience of personnel all
req~ire time and effort. Costs of speedup in these areas can be considerable,
particularly to correct the errors that may result.

~m~jor operat~ng and associated activities are large and involved, will
~ulre mUch time and skill to effect change, and are expected to react
S oWIY.to those adopted, initial efforts may better focus on support
operations.
en . . The support sectors would include accounting and audit ,
res8lneenng, field staff, insurance, legal, member relations, personnel, and
se: arch and development. In many situations, changes in the support
Ors can be implemented faster than those in the major operating areas. If

19
this happens, some adjustments may be necessary later in the support areas
to permit proper interaction with the operating area changes.

Priorities may require bringing some segments of the reorganized

association up to full speed before others. The synergistic potential of all
areas should be listed and those with the highest potential should be
implemented earliest to the extent possible.

Organizational Areas

Membership Retaining and enlarging the business of the entire group of

member and nonmember patrons is critical to the association's success.
Media messages, meetings, and personal and written contact should be used
to generate interest and patronage. Any changes in policy or procedure
resulting from the unification should be clearly and promptly
communicated. Efforts should begin at once to familiarize regular and
potential patrons with the new cooperative name, logo, and different trade
names and brands if such changes are made. Iffacility closure or
consolidation is planned, the affected membership should be alerted as soon
as possible. Effective communication of the advantages of such moves can
go a long way toward retaining a considerable part of previous patronage.

Board of Directors When the ini tial board of the new association is
composed of most or all of the directors of the joining associations, it often
serves only on an interim basis. When the first annual meeting is held, a
new board composed of fewer directors is elected to represent the combined
memberships. A committee may be formed within the interim board that
permits a relatively small number of board members to oversee most of its
business. They will recommend most of the decisions to be made by the full
board. The interim board must take steps to enable management to operate
effectively in a situation that is likely in at least some state of confusion. It is
necessary that a fine line be steered, however. The initial board must be
neither so forceful that it feels required to interfere in management's
business nor so awkward that its decision making ability slows down.

Employees Keeping the employees of the combined organizations

functioning in a normal manner during a reorganization is difficult.
Employees are understandably concerned when they do not know who will
be retained or let go, who will be required to change positions, or who will
have to transfer to other locations. Making decisions in this area and
clearing the air for normalization of business duties is one of the first tasks
that the new management will have to undertake. It is also one of the most
essential and should be accomplished as rapidly as possible.
Pay and benefits should be standardized so persons with the same
responsibilities receive equal compensation. Employees assuming more
responsibility in the same or higher positions should receive compensation
increases. If some personnel must be demoted and cannot be paid at their
previous rate, they may have to be let go. This is so their probable
disaffection with the new association does not spread to other employees.

While the ideal situation would be to fill each position with the best person
available, such is frequently not the case. Agreements during negotiations
may require that selected employees occupy certain positions in the new
organization. They may also require that long-term or otherwise favored
personnel be retained in some position. The agreements also often provide
that a fair allocation of employees from each joining organization will be
slotted in the new association if an overall reduction of employees is
anticipated. Although selection of personnel, particularly those at the
manager and supervisory level, may not be completely independent,
decisionmakers will usually have some flexibility in selecting personnel.

If extensive personnel changes are planned, it may be wise to think about

getting them developed early in the post-reorganization period when many
changes are occurring. This may give those directly responsible for
managing the positions to be filled more clout in the selection process.

General Public It is wise to keep the public informed about a

reorganization to squelch rumors and still community fears. It can also
preserve a favorable image when facility closure/consolidation is considered
with its accompanying loss of employment and tax revenues. Stressing the
association's enhanced growth potential and economic impact on the
community may help draw more favorable rulings from administrative and
tax officials. It can also strengthen the organization's potential from the
standpoint of suppliers and customers.

Support Activities

Accounting and Audit The firm participating in the feasibility study and
aiding the negotiating committee should be the prime candidate to handle
accounting and audit requirements. If other firms have been used by the
jOining organizations, they may also enter into consideration. If a previously
used firm is considered, of course, it should be kept in mind that the
reorganized association will likely be considerably larger and more complex
than previously.

Opportunities to upgrade the computerized activities of the new association

21
 by adding more powerful equipment and more experienced staff, must be :
carefully appraised. Costs and benefits must be weighed in a realistic
fashion. The evaluation must be stripped of any glamour that may attach
increased emphasis on the computerized approach.

The ease with which firms' accounting systems are combined will depend:
upon a number of factors. Differences in size, complexity, type ofbusine
and financial structure will be the leading factors. Use of the same or l
different accounting firms by organizations joining and the degree ofthescr
firms' experience and expertise will also have an impact.

Different adjustments will also be needed if one association's system has

been computerized and the other has not. If both systems have been auto'
differences in the type of computer system utilized may come into play. C

,
The accounting systems previously used by the joining organizations must'
function alongside the newly developed system until the new system is
working smooothly. This is particularly necessary if the system is being
computerized at the same time or if different existing systems must be ma
compatible. The new system must be set up carefully because the potential
for disaster is considerable.

The ability of an accounting firm to train and assist employees and design a
computerized management information system should also be an importan·.l
1
factor in the selection process. Improved decisionmaking capabilities are ,y,j
particularly important to a reorganized association whose executives have t;
not previously been exposed to such systems. j

The financial statement of the new organization cannot entirely reflect the
effects of the combination. External economic conditions impacting on the
reorganized association are constantly changing. Therefore, an unbiased
reading of reorganization results entirely attributable to the merger may be
difficult. A reasonable period of time must be allowed for the pluses and
minuses of the combination to net out.

Engineering Cooperatives that have engineering departments use them

for installation, adjustment, and maintenance of all facilities and
equipment. Engineering sections should be at the forefront in situations
where the new association must deal with problems of excess capacity.
Capacity adjustments are often among the principal reasons for a
reorganization being considered in the first place. Therefore, engineering
personnel may be called on to provide assistance as soon as the new
organization begins to come together.

22
h
The engineering section can close facilities, rearrange equipment, balance
production processes, and plan and arrange for the improvement of existing
equipment and facilities. It can also assist in the purchase of new equipment
and facilities based upon the improved business prospects and strengthened
financial condition of the new organization.

As part of the new organization's planning efforts, the engineering section

should draw up a detailed plan indicating efforts and expense necessary to
improve plant facilities and opt;!rations over the long term.

Field Department The one-to-one relationship developed by field

personnel with cooperative members can be particularly useful in a merger,
such as educating patrons on the benefits of the new organization and
encouraging continued patronage.

Standardizing the practices and procedures of the field force of the

combined organization is an immediate necessity. This will ensure that the
overall membership is being treated uniformly and will minimize charges of
favoritism. Weaknesses in the field organizations should be weeded out
immediately as should employees who have a negative reaction toward the
reorganization. The face-to-face relationships between field personnel and
patrons require a positive and professional approach if a favorable image of
the new organization is to be built. If the organizations' resources have not
been sufficient to establish a field force, the increased financial strength of
the new association should. Field personnel shOUld be at the forefront in
creating, maintaining, and expanding markets.

Legal The reorganized association may require more sophisticated legal

assistance due to its greater size and complexity. It may also be necessary to
establish an in-house legal department or maintain a private firm on
retainer. Selecting either is a task that shOUld be undertaken with care.
Much checking and consulting on qualifications is required before the final
selection is made. A bad selection can be costly.

While savings in the legal area are often promoted as one of the pluses of
reorganization, it is not always the case. More talented legal expertise may
be required for the new, larger organization and on a more frequent basis.
While a reasonable ceiling must be maintained on legal expenses, the
critical nature oflawyers' actions must be considered. This requires that
reorganizing associations rate quality of performance very highly in any
evaluation of costs.

Insurance Combining insurance policies of the firms joining may give the

23
new association greater leverage in selecting coverage. The large number oft
plans available and the great variation in cost among them should
encourage the new organization to examine a broad range of policies. More
favorable features may be provided and lower premium costs gained. Even
if a previously used insurer is selected, by opening the process to
competition more favorable terms are likely to be offered.

In any case, it is imperative that no lapses are permitted in insurance

coverage because of technical irregularities in the reorganization process. It
is particularly important in the case of Workers' Compensation Insurance
(WCI) where several States require election between private or public
carriage of WCI before unified operations begin. In the absence of such
coverage, the association will become liable for injuries sustained by
employees.

Member Relations The importance of keeping the combined

organization's membership involved and informed has been noted before
and cannot be overemphasized. If the member relations unit needs
strengthening or if policies and procedures need upgrading, formation of
the new organization is a good time to begin. The member relations
programs of each joining association should offer something positive that
can be adopted. Use of a wider range of communication channels and
techniques should overcome any perceived loss of member control.

For merging associations that currently have good member relations staff
and programs, there is the opportunity to achieve savings.

Personnel The combined personnel department must develop job

descriptions, beginning with key staff members and working down, as soon
as possible. This will enable each employee to fully understand individual
duties and responsibilities under the new management. If the strengthened
resources of the new association permit addition of jobs not found in the ole
organizations, the position description will assist in defining their
requirements.

Planning for the combining of staffs is often developed to blunt expected

negative reactions. Each staff will have a variety of backgrounds,
experiences, and operating methods that can be used in a posHive fashion,
however. If only one organization's operating methods are adopted, if
communications break down, or if the shakeout period is shortened to
permit only minimal change, opportunities for improvement may diminish

Research and Development Product research and economic planning

24
opportunities not previously possible may be undertaken after the merger if
the resource base of the new organization is strengthened. Many
associations that merge have no experience with this type of activity. They
may decide to form a department on the basis of what the competition is
doing or based on a suggestion from within or outside their organization. In
all cases, a careful evaluation should be made of the need for such internal
staffing and the payout to be expected. It may be decided to use outside
consultant services when required and to move the freed-up resources to
other areas where they can have a more valuable impact. This may be the
wiser course for those associatiqns with internal research or planning
activity having only marginal value.

Operating Sectors

Marketing, Purchasing, and Related Services At the onset of

combined operations, it is necessary to standardize policies and procedures.
They should also be upgraded quickly and with minimum disruption. The
end requirement is to develop an operating system that will preserve the
customer bases of the merged associations and lay the groundwork for new
growth.

Pricing Policy-If the merged organizations have been competitors, pricing

policies for their competing product and service lines may have been quite
similar. If these pricing methods have been responsible to some degree for
weakened operating results, price changes proposed to improve those
results must be undertaken gradually. Ifnot, competitors may be drawn in
to disrupt the market. Where product lines are completely different, price
changes will also have to be closely evaluated. The threat posed by potential
competitors and the actions they might take in light of different pricing
procedures will require careful study. A considerable decrease in costs, for
example, might indicate that price reductions could be made with little fear
that the competition would be able to react in a forceful manner.
Standardardized policy to preserve customer goodwill should be the
overriding concern.

Credit policy-Credit policies of organizations that once competed are also

likely to be similar. Those that have not competed or that have unlike
product lines may be different. Here, too, development of a uniform credit
policy that is competitive and that maintains the customer base intact is the
prime requirement. If there is a problem of aged accounts receivable, this
should be confronted firmly at the outset of reorganization. The credit
policy should be tightened up if overaging has been a continuous problem.
In no case, and this should be spelled out in the reorganization agreement,

25
should the new association begin life overly weighted with aged accounts "
due.

Advertising-Advertising and promotional strategies may have to be revi

after the reorganization. If the new organization adopts a name different '
from any of the merged firms, along with new product names and labels,
considerable emphasis will have to be placed on establishing new
identification. Even if a previously used organizational name is selected,
and product names and labels remain the same, there will be an
identification problem. In this case, steps will have to be taken to
"preserve" the trade territories of the joining units whose names have b
dropped.

If an expanded product line is handled by the new association as compared~i

with those of the merged organizations, problems may arise in allocating ,
promotional dollars among products. Management may concentrate dolla '.
to move higher margin items while members want other items promoted i ..
which they have greater self-interest. ':

When a facility needs to be closed or consolidated, publicity will be neededl

to point affected patrons to alternate facilities. If different names and logos"
are adopted, facility and equipment markings will have to be changed. i~
Priorities will have to be set as to where the changes are implemented first.,';
ii
Building on the momentum generated by formation of the new organizatiOlli
will itself require advertising dollars. Entry into new markets will also '.i
require promotional expenditure. Additional advertising budget should be I
provided for these and other changes. However, some balance will have to
be devised between fair treatment for each of the merged organizations.
:;1
Operating system- The entire sales-inventory-production-procurement :<c
chain will have to be looked at in some depth soon after the reorganized .Ii
association begins operations. At the outset the emphasis should be on ,~
standardizing any areas of the merged organizations that could have a
negative effect on customer goodwill. A questioning attitude by patrons
usually prevails for some time, particularly where a merged organization has
lost its original identity. It is critical, therefore, that any potential for unfair '
treatment be removed before it can cause problems.

Distribution No matter what the size or complexity of the combination,

distribution usually turns out as an area capable of producing considerable
economies. Many transportation and warehousing inefficiencies will
probably be able to be eliminated soon after reorganization. Overlapping

26
routes, underutilized equipment and facilities, overcapacity, small scale
purchases of fuel and other supplies, and lack of centralized maintenance
facilities are just some of the possibilities.

If the joining organizations' distribution operations have been inefficient,

outside management may be needed. Ifvery extensive modifications and
changes are required, priorities will have to be set to assure that the greatest
payout results over the long term.

Finance Financing offered to merged organizations may be furnished

both in larger amounts and perhaps at a lower cost, depending on the
reduction in risk perceived by the capital source. While access to capital will
likely improve, the documentation and other communication necessary to
prove creditworthiness and to support capital requirements may change
considerably. It will probably increase in amount and be considerably more
expensive. The staff may be hard pressed to handle these increased
responsibilities. They may also be busier discovering and evaluating sources
of capital and determining how an increased but limited capital supply
should be allocated among the various needs of the new organization.
Additional personnel may have to be brought in from the outside. This
introduces another unknown quantity into a management staff that is
probably already undergoing a considerable shakeout. This may extend the
time period for smoothing out the reorganization process.

Ways in which banking services are provided must also be analyzed

carefully. Banks patronized before the merger may have been outstripped in
terms of the services they can provide. The competition in this area and the
substantial differences in both costs and packages of services that may be
offered require detailed analyses.

Significant features of the implementing phase of reorganization are shown

in figure 3.

OBSERVATIONS FROM REORGANIZED COOPERATIVES

Observations about reorganization were obtained from managements of

associations that had gone through the process. They had been involved
with almost 50 mergers or acquisitions between 1977 and 1983. About 10
percent of the formations were acquisitions and 90 percent were mergers.
While the operating results of some were considered more successful than
others, only one reorganization was reported as an outright failure.

27
 .

~
Fig. 3-lmplementing the Reorganized Association "

Board of directors and management Monitor implementation process "

evaluate immediate- and short-range closely for any adverse effect on the
plans to get the new association customer base, Consider long-term ,~
underway, ~ consequences as well as short-term
results of any changes thought
necessary,

i I
Set time for association to get up to Maintain close liaison with legal and
planned operating standard, Identify financial counselors to assure that
critical tasks, Establish goals, negative consequences do not result '"
from restructuring, ,

I I .J

Place priority on straightening out Modify the long-range plan if changes;

areas involving members and required in the implementation phase,'
employees, Establish lines of suggest it Otherwise, hold to course.'
communication, circulate plans and
programs, enlist and encourage ;
support,
';
-I ,
\
Restructure operating and support
areas according to synergistic
potential, Set time required to effect
l
action in each area, 1
~
~,,~

I
Plan for optimum results when )
,~
interdependency among operating
and support areas requires
scheduling at less than full synergistic
potential,

1
Maintain implementation plan on
schedule insofar as possible. Keep .
mid-stream changes to minimum,
)

28
d
Considering Reorganization
Influences prompting one association to consider merging with, or
acquiring, another organization most often included one or more of the
following:
1. Program of aggressive action mounted by management officials to
improve business opportunities and growth prospects.

2. Action of the board of directors encouraging management to reorganize.

3. Request by officials affiliated with an organization subsequently merged

or acquired that it be considered for such action.

4. Need to obtain additional financial resources.

5. Information by a trade, lobbying, or similar group of the availability of an

organization falling under its service umbrella.

6. An economic decision influenced by the "bargain" status of the

reorganization prospect or favorable cost-benefits features when matched
against proposed internal expansion.

7. Need to improve timeliness or accessibility in acquiring new technology,

management, markets, or production inputs.

When reorganization was first considered, the overwhelming tendency was

to keep the matter secret. In several instances, only certain board members
and top managers were informed. Employees and members were rarely let
in on the plan. This was the case both for the association proposing
combination and that or those organizations which were to be the joiners. In
a few instances, it was reported that the board or management of the joining
association reacted negatively to the initial proposal ofreorganization. In
most cases, however, a completely open-minded situation existed.

The time between the first consideration of reorganization and the initiation
of feasibility studies ranged from 1 to 6 months. One organization,
however, said it took a year to initiate a feasibility study. In the vast majority
ofreorganizations, the acquiring partner focused on a single organization to
be considered for combination.
29
Evaluating and Planning the Combination

In analyzing the strengths and weaknesses of a proposed combination,

acquiring organizations tended to place primary attention on certain are
the joining organization. Other areas were less significant or were a tossu
with about equal numbers of acquiring organizations considering them o.
either greater or lesser significance.

More significant areas are:

1. Short term operating results (most recent 2 years).

2. Plant location (s), capacity, and utilization.

3. Financial structure and obligations.

Less significant areas are:

1. Long term operating results (most recent 5 years).

2. Current or potential unionization of employees.

3. Availability and cost of production inputs.

4. Market access. ..~

5. Expected impact of government review of the reorganization proposed1

-j
,I

More or less significant areas are:

1. Organizational structure.

2. Management depth and talent.

3. Membership characteristics.

4. Employee utilization and productivity.

5. Business mix and diversification potential.

6. Transportation costs.

7. Synergistic potential in general.

30
p

Cooperatives used a full range offeasibility analyses to evaluate a proposed

com bination. The formal analysis usually consisted of a structured
evaluation, relatively broad in scope, and with results usually
communicated by written report. The informal evaluation was less
structured, not always in report form, and general in coverage. It sometimes
concentrated on a limited number of key items considered minimally
necessary for reorganization decisionmaking.

Regional cooperatives usually relied on management or on private

consulting firms when a formal Teasibility report was required. Local
associations tended toward the use of university or government
consultants, or their regional's staff people. When an informal report was
required, selected members of the organization's management staff were
almost always charged with the task.

Cooperatives rarely called for two or more feasibility studies. In the cases
studied, only some of the larger combinations called for mUltiple studies.

The feasibility reports were generally positive towards reorganization when

combination of regional organizations was considered. For local
associations, judgments by evaluators were almost as likely to be neutral or
negative as they were to be positive. This would indicate that the original
proposals for most of the regional combinations were carefully considered.
It might also indicate that evaluators were less willing to give leeway to the
small, usually weaker, local organizations, since they had fewer resources to
fall back on if a wrong decision was made. Most analyses were completed
within 6 months. The negotiations following required about the same
amount of time.

After the boards voted for reorganization, the details of the proposal were
presented to members for their vote. The time required between the
director vote and the membership vote usually involved 3 months or less
and frequently required less than 1 month. Thus, the entire effort, from the
original idea for reorganization until final vote by the memberships, was
Usually accomplished within a year.

~n most cases, reorganization proposals were approved. However, officials

Involved in a number of reorganizations during recent years said that more
than 25 percent of their proposed reorganizations were turned down. They
also said that the tendency may be increasing, particularly among the larger
associations. All organizations in the survey recognized the critical nature of
membership support. Most had developed strategies to help assure that it
Was sufficient when the time came.

31
All organizations stressed the importance of meetings and written
communication regarding the proposed reorganization. They also
emphasized that all members and employees should be involved. Infom
employees of the prospect of reorganization before the proposal is prese!
to the membership was stressed by most of the surveyed associations.
Enlisting the support of employees was considered essential in insuring
membership approval. One association told of a 2-month "prep" period
inform employees and encourage member support. Another scheduled f
8 weeks to communicate with employees and an additional 6 weeks for
members. Still another thought it was important that the final negotiated
reorganization proposal receive unanimous support from each board
involved if maximum employee and member support were to be expecte

Certain decisions should almost always be made in the negotiating sessio

prior to formal reorganization approval. Those include:

1. Size of the consolidated board of directors. Elimination of some direct(

when required. Determination of new district boundaries when necessal'J

2. Reassignment of management and redesignation of their tasks.

3. Facility closure or consolidation.

4. Significant changes in operating policies or procedures.

5. Rearrangement of financial structure and change in policies.

6. Employee reductions.

7. Efforts to be made in the member relations area to maintain

reorganization approval.

When reorganization was approved, most of the merging associations

experienced little difficulty in joining staffs below the management level.
Supervisory responsibilities were often expanded in the new organization.
Compensation levels were also frequently increased, and significant
improvements in employee attitudes and motivation were sometimes
noted. Additionally, few problems were encountered in combining
operating and staff activities. Once sufficient time had elapsed, most of the
confusion and commotion died down and kinks associated with changes ill
practices and procedures were straightened out.

32
Most of the reorganized associations were able to combine major activities
in 3 to 12 months. The majority required less than 6 months and only
occasionally was more than 12 months required. The longer period was
usually concerned with plant consolidation or elimination, or an issue that
should have been decided earlier.

Managing the Combined Organization

The survey checked to see if managements from the joining organizations

were blended proportionately in the merged association. It was found that
most of the combinations involving regional associations and many of those
involving local associations, particularly those of larger size, attempted to
thoroughly blend their management staffs. Positions were assigned based
on the numbers, types, and levels of managers brought in by each joining
organization.

For the local associations, particularly those in the smaller category, there
were often fewer opportunities to retain the acquired organization's staff.
Sometimes they were reluctant to do so when the opportunity existed. In
any case, several of these organizations reported that the consolidated
management staff tended to be more unblended. Managers from the
associations proposing combination dominated in leadership of the
combined associations.

The former assignment of the initial CEO of the combined association was
CEO of the association proposing com bination in the case of all
organizations surveyed. Only one CEO had been replaced since
appointment, and this was because of retirement. His replacement was from
the acquiring component.

Association managements tended to be attracted to organizations that were

similarly structured. The use of strategic long-range planning was frequently
a feature of the association proposing the merger. Categories of major
products or services handled by the combined association were usually the
same as those handled by the joining organizations. Increasing the
diversification ofthe association was considered important because it would
permit better utilization oflabor, enhanced sales opportunities, and help
counteract cyclical business conditions.

The number of directors on the board of the combined association was

usually greater than on the board of any joining organization but less than
the total for all joiners. For many reorganizations, plans were to reduce total
directors before formal approval of the combination took place. Elsewhere,

33
 ''l,'
1'I
'~
:!
j
1
l
similar steps were taken in this direction soon after the merger. ASSignrnl','
of directors to committees was much more likely to be used on the board
the parent component of the reorganization than on the board of a n .
acquired unit. Almost all of the combined associations' boards had a ~
committee structure, particularly executive, audit, and compensation,~
committees. Both components held monthly board meetings, almost 'l
without exception. Reorganized associations continued to do the same. ~'.'
Managements of the components reported to their boards almost.
exclusively on an oral basis. The managements of the combined associaf
followed suit. Only a few parent components' managements reported bot
orally and in writing at the monthly meeting. The management of the "~
reorganized associations continued in this pattern. ,I
The policy of distributing proceeds of the combined association, in terms ~
proP?~tions of ~as~ and paper, always followed the pattern set by the '~
acqulflng aSSOCIatIOn. ';

Where capital revolving periods were in place, the parent component's w~

often considerably shorter than the joining organization's. The revolvingi
period of the combined association was usually the same as the parent i
organization's. Plans for instituting a satisfactory revolvement plan were a;,
strong sales tool in merger endeavors. The survey indicated that membenl,
of some joining organizations encouraged mergers primarily to shorten
their associations' revolving periods.
i
Securities in addition to those of a replacement nature were seldom issued~
when the combined associations were organized. A few associations "
reported, however, that some securities issued by their joining componentt
were consolidated or retired when the combined firm started operations.,

Cash transactions were usually involved when a firm was acquired. Merge~
and consolidations usually included stock transfers or similar noncurrency;,
transactions. These were adjusted to maintain previous balances of
ownership, if necessary. Assets involved in the transfer were almost alway~
transferred at depreciated book value. Reorganization tended to remove
most or all of the problems connected with obtaining adequate finances. It :
had sometimes been a problem for the parent unit and had frequently been,
a problem for the joining organization.

Review of the reorganization proposal by government authorities, if

required, was considered of minor significance. None said they were
hampered in getting government approval for the combination if it was
necessary. In the cases where it was necessary, approval was received in 3
months or less.
34
Results of Combining

AIl but one of the reorganized regional associations and about 80 percent of
the reorganized local associations considered their combination a success.
The regional combination that did not succeed was due primarily to a failure
to communicate with joining association members. What they really
expected the new association to accomplish for them was not known. The
unsuccessful local associations were considered more likely to fail over the
long term, although judgment was somewhat restricted by poor economic
conditions at the time reporting occurred. Success or failure was usually
apparent within a year.

In terms of prior expectations, results of the reorganizations were often

more favorable than anticipated. The combined associations were
particularly satisfied with improvements in marketing, financing, staff
support, and overall management. They were only slightly less pleased with
positive changes in supply, service, and transportation activities.

Significant ways in which the combination affected the joining associations

were:

1. Introduced a more potent competitive factor into the marketplace;

strengthened bargaining ability in product, supply, or financial markets.

2. Firmed the weakening business prospects of one or more joining units in

the combination.

3. Prepared a base offering more favorable growth prospects for the future.

Thejoining units studied were usually either (a) fully merged into their
acquiring partner's organizational and operating structure with little original
identity remaining, or (b) merged but with many functions or activities still
identifiable with the joining organization. Seldom was the joining
component set up as a separate division or subsidiary, or as ajointly owned
subsidiary with another organization.

Managements of the reorganized associations measured what had been

learned from the merger and what they would do differently if they had it to
do Over again. Highlights of their responses included:

"Communicating with members is the most important factor. Don't

promise anything you can't deliver. Improving communications with
members when the reorganization is proposed, studied, and activated is the

35
most important factor that can be stressed. Many managers are too busy
with other duties to place enough emphasis on this. Promises must not be .
made if they can't be delivered on."

"Communications is the key. Three or four weeks before final board

approval, [I] made information [on the proposed reorganization] a
to members of the management staff not previously informed. They
pleased with that approach ... [I) would better inform employees below the·
supervisory level in any future reorganization ... We should have hired an
attorney who was experienced in mergers. Time and expense were H;;'IUI.I,...
in covering his shortcomings ... Members were guaranteed as good or hette• •
service than they had been getting. An atmosphere of trust must be
Determine what is fair before anything is put together."

"[We] should have spent more time in establishing goals .. .ln any future
moves, [we] would have the number of board members and districting
resolved beforehand. It may be touchy in trying to resolve it
afterward ... Possibly, more meetings with employees should have been
held .. .lf directors at the joining organization have set operating policy
than management, a difficult situation has likely been created that will
require straightening out...A firm attitude must be taken on employees;
only the best should survive as employees of the consolidated
organization. "

"Within 6 months to a year, most merged organizations are pretty well .)

l
absorbed. No lengthy period of absorption is needed ... Modern
communications technology and the computer assist greatly in merging
organizations quickly ... Administrative features of merging are down pretty
pat... [We] have not had any problem with business going down for a brief
period after merger before it rises again ... Concentrate on improving the
basic package of services offered to farmers when a merger occurs; do not m
afraid to eliminate sideline businesses that are weak or strain resources ever
when much clamoring initia1Jy results."

"Be convinced that what the farmers want is clearly

understood ... Membership approval is the key to successful
reorganization ... Do not let a deteriorating financial situation force you into
merger without thorough study ... Be aware that former employees may be
able to set up a business in competition with your own and the risk that this
entails."

"When successful and weak organizations merge, the combined business

usually turns up. [The] tendency is for the two organizations to go downhill

36
during an adjustment period before the combined business increases.
Inefficiencies may be covered at first but eventually show up."

"Membership relations is the critical factor in mergers ... [You] must give
information in as much detail as desired. Management people from both
organizations must be made available for discussion."

"[The] manager is the key individual in deciding whether a reorganization

will work ... [We] put emphasis on informing employees initially, then the
membership. Employees were sold on the wisdom ofmerging ... The support
of county agents was also enlisted in merger support...At first, our members
were worried about losing organizational identity, and the joining firm's
pricing policies. Communication efforts were able to overcome these fears."

"Several mergers during recent years have involved as many as 7 or 8

cooperatives over a relatively short period of time. Some of these may have
to undertake demerger. The skill requirements of management increase
more rapidly as the size of combination increases. The size of many mergers
may have outrun management skills available, with the result, a less
efficient mode of operation ... Fewer problems seem to crop up when a
larger, stronger organization combines with a weaker organization or when
a predominately grain organization merges with a petroleum or fertilizer
cooperative. "

"In merger proposals involving local associations, the managers usually

work it out between themselves before it is proposed to their boards. They
then usually offer the proposal initially to board members they feel
comfortable with rather than the full boards."

"There had been problems for years at the organization that requested
jOining with us. It had refused to choose management that was generally
accepted, with the result that the community was divided. We brought in a
new manager, but he was not agreeable to all parties. The farmers drew up
sides against him with the result that the joining firm went under a few years
after the merger occurred. Some of its leadership is now anxious to rejoin,
but we do not know how much volume they represent. In any case, we
would not even consider it without commitments in writing (marketing
agreements) from members. These were not required before, but now the
climate is different."

37
References
[1] Drayton, C.I., e. Emerson, and J.D. Griswold, Mergers and Acq .
Planning and Action, Financial Executives Research Foundation, Inc<,
York,1963.

[2] Casler, L.A., "The Pitfalls of Acquisitions," Dun's Review, June ••

[3] Thor, E., M. Revzan, and A.D. Hutchens, A Guide to Procedures

to the Consolidation 0/Agricultural Marketing Cooperatives, Informati
Bulletin 67-1, Giannini Foundation of Agricultural Economics, Unt
of California, Berkeley, March, 1967.

[4] Baarda, J.R., State Incorporation Statutes/or Farmer Cooperatives, f

Cooperative Information Report 30, U.S.D.A-Agricultural Coopera
Service, 1982.

[5] Worland, R.H. and M.e. Hallberg, Member Reactions to Mergers

Artificial Breeding Cooperatives, Pennsylvania Agricultural Experimen
Station Bulletin 768, University Park, 1970. .

38 * U.8. GOVERNllENT PRINTING QPFICE: 1984 - 525-012 ..

. . .tEICS Readings
Abrahamsen, M.A. and J.W. Mather, Approaches and problems ill
",c""'_"III> Cooperalives, FCS Information 54, U.S. Department of
"1Drt~I.lIlLUre, Washington, D.C., 1976.

tC} Cramer, G.L., "An Economic Analysis of the Merger Component in

Growth of Agricultural Cooperatives," Unpublished Ph.D.
Dissertation, Oregon State University, Corvallis, 1968.

(D) Garoyan, L. and G. L. Cramer, Cooperalive Mergers: Their Objeclives,

Success, and /lIIpaLl Oil (jf()ll"lil, Station Bulletin 605, Oregon Agricultural
tc..;:'IIYr... r;mpnt Station, Corvallis, 1969.

lE}Garoyan, L., S.R. Thompson, and R.K. Wentzel, Plallningand

Scheduling Post- L'nificalion Decisiollsji}f Agricultural Businesses, Agricultural
Extension, University of California, Berkeley, Undated.
0
IF) Moore, D .. "Why Are We Losing Farmer Cooperatives ," Farmer
Cooperatives, Volume 49, No.2, May, 1982.

1G} Mueller, W.F., The Role of Mergers in the Growth ofAgriculrural

Cooperatives, California Agricultural Experiment Station Bulletin 777,
Berkeley, 1961 .
. (H) Swanson, B.L., "Pre- and post-Merger Characteristics of Agricultural
Cooperative Reorganizations and Implications for Planning, Financing, and
Growth," Unpublished Ph.D. Dissertation, Texas A&M University,
. College Station, 1975.
 u.s. Department of Agriculture
Agricultural Cooperative Service

Agricultural Cooperative Service (ACS) provides research,

management, and educational assistance to cooperatives to
strengthen the economic position of farmers and other rural
residents. It works directly with cooperative leaders and Federal
and State agencies to improve organization, leadership, and op-
eration of cooperatives and to give guidance to further
development.

The agency (1) helps farmers and other rural residents develop
cooperatives to obtain supplies and services at lower cost and
to get better prices for products they sell; (2) advises rural resi-
dents on developing existing resources through cooperative ac-
tion to enhance rural living; (3) helps cooperatives improve
services and operating efficiency; (4) informs members, direc-
tors, employees, and the public on how cooperatives work and
benefit their members and their communities; and (5) encour-
ages international cooperative programs.

ACS publishes research and educational materials and issues

Farmer Cooperatives magazine. All programs and activities are
conducted on a nondiscriminatory basis, without regard to race,
creed, color, sex, or national origin.