Preparing for transition
How Cooperatives and Agribusinesses Can Prepare for Mergers and Acquisitions
Merger and acquisition deals are becoming a large part of the agribusiness and cooperative industries today. Every deal comes with unique circumstances and stresses, but some of the challenges on both sides of the deal can be mitigated if certain steps are taken to prepare for the transaction.
Understand your business
Before any merger or acquisition, it is important to thoroughly understand your own business. Performing an analysis of internal and external factors, most commonly through a SWOT (strengths, weaknesses, opportunities, and threats) analysis, provides you with a wealth of information. Strengths and weaknesses are internal aspects of your company which will offer insight into what exactly you can improve to enhance the company. Threats and opportunities are the external factors that affect your business.
Your strengths and weaknesses might include the stability of management and personnel, your company culture, technology, or the quality of facilities and infrastructure. Threats and opportunities might include the national or local economies, the regulatory environment, price projections for your goods or services, or your competitive position within your market. Each issue will demand attention, discussion, and possibly more information.
Once you’ve explored the areas of concern or promise, you can decide first if a merger or acquisition makes sense. If it does, develop goals for the transaction. One of the goals of any transaction should be to increase your strengths and opportunities, while minimizing your weaknesses and threats. Combining organizations might address some of the following issues:
- Combining duplicate functions
- Better utilizing excess capacity in one or both organizations
- Achieving economies of scale
- Reducing the cost of capital
- Better cash and inventory management
- Increased market power
A feasibility study is an important tool in deciding whether a merger or acquisition is right for your organization. The study should consider the financial information for each organization as well as a projected balance sheet, statement of operations, and cash flow forecast for the combined operation. The projected financial information should highlight areas where revenues and gross margins will increase and expense savings will occur. The study should also identify any environmental issues or liabilities that need to be addressed in order for the combination to be successful.
Tax-efficient deal structure
There are two primary forms of transactions: stock purchase or asset purchase. Buyers will typically prefer an asset purchase because the buyer does not want to assume any of the underlying liabilities of the existing company. There are also tax benefits for the buyer — an asset purchase allows the buyer to allocate a portion of the purchase price to fixed assets and goodwill. Fixed assets are eligible to be depreciated for tax purposes using accelerated depreciation methods and goodwill is written off by the buyer over a 15-year period. The seller would be taxed at ordinary income tax rates for the amount allocated to fixed assets and capital gain rates for the amount allocated to goodwill, which is significant because capital gain rates can be as much as 20 percentage points lower than ordinary income tax rates.
In a stock purchase, the buyer has only limited ability to write-off a portion of the purchase price for tax purposes and assumes the liabilities of the existing company. Also, in a stock purchase, the seller benefits from beneficial tax treatment because the entire transaction is taxed at capital gain rates. Obviously, the challenge of these transactions is that both buyer and seller will be negotiating to secure the best deal for their operations.
The unique characteristics of cooperatives require that several special considerations are addressed for any merger or acquisition to be successful:
Approval by the board of directors
The cooperative should appoint members to a committee that negotiates the transaction and plan, which should then be approved by the board of directors.
Approval by the members
After the transaction and plan are approved by the board of directors, generally the membership needs to approve them. Special attention should be given to the appropriate state cooperative incorporation statutes — states have different rules concerning simple or larger majorities. Sometimes membership approval is not needed at all.
The articles or bylaws of the acquiring cooperative may need to be amended to authorize additional stock to complete the merger, which would require membership approval. Also, if a cooperative will be dissolved in the transaction, this should be approved with a vote of the members of the dissolved cooperative.
Agriculture cooperatives are exempt from anti-trust regulations if, among other requirements, they conduct more than 50 percent of their business with members, and each member of the cooperative is an agricultural producer. The transaction must not violate these requirements.
Equity retirement plan
A transition plan should be developed if equity retirement plans are converged. How will existing equity balances be handled, and when will they be paid, if at all? Will the buyer pay old equity balances? These types of questions need to be answered before moving forward.
Combining board of directors
The main challenge in combining the boards of directors is maintaining representation for all of the geographic areas, while only retaining a workable number of directors on the board. Typically, a transition plan requires that some director positions are eliminated as their terms expire.
Many businesses are considering merging or acquiring operations as a way to enhance their operations. The end goal of any business combination should be for one plus one to equal three. Combining with another company for the sake of growth alone rarely justifies the effort and energy required by the transaction.
A trusted advisor with experience with mergers and acquisitions can help make a complicated process efficient and effective — if not exactly simple.