> Tv Division of Agricultural Science I UNIVERSITY OF CALIFORNIA WILLARD F. MUELLER THE ROLE OF MERGERS # C "E 3 Q in o # > "£ u o a :0 O u 1 Z 00 §> -O 00 > .£ 1:8" s«S.-g o S o w O a. x •£ o ♦■ « TJ £ C CM *s rH CO " CO H— # * * # CO CO Oi CO q 00 CO eS ^ © S| fcg rH a t- o i-i © fl-fi eg rr M K © • I s ! < 8 £- CO ^ CO "* fl.2 If lO 00 CO CM IO P © tH CM iH CO ho P CO o h ■s s o co CM T- CM* £ ° > P4 S lo in m «tf IO © -J3 CM CN OJ CM CM B ■ © © Pi < o o -P4 p, " CO CO CO o: OS 00 -t CO iH oo fcP c< CO s CO © bD'X3 t-i SajD »r; oS rt a © 2 p. in in ■sii as Si tH Ifl CO l> CO J, CM CM *l IO OS ~ * * * +H t- * CO co «* CM c- CO 13 =»i gp -* C5 CO CO c* CO * g CO tH CO IC CM .s co CO cc3 CO 1-4 o © C-J3 Si! <* CM « rH CM a .8 — p, " CO lO 00 CO CM o t> P4 g CM CO CO CO CO i-\ iH •H l-{ rH ""—Is g p. 5 g «.2 ,M P. 6 a CO CO , Si fit "3 ^ ° ^ 03 1? 1 § o *: 1.2 E "2 "S boCJ "c" CO n 111 'a ^ o Eh !3 « S E w «3 pq © © p > > © © © © iiis [50] The acquired concerns had combined assets of $5,300,000 and sales of $19,- 500,000. The sales of acquired concerns were 23 per cent as great as the net sales growth during 1945-1955 of the acquir- ing cooperatives, and the assets of the acquired concerns 22 per cent as great as the net asset growth of the acquiring cooperatives during 1946-1955. These acquisitions were made mainly to achieve greater vertical integration into fluid milk and ice cream. (An indi- cation of the greater degree of vertical integration is the fact that between 1945 and 1955 the ratio of sales to assets of these five associations fell from 4.8 to 1 to 3.9 to 1.) We can only speculate as to the effects of this increased integration on the growth of these associations be- cause we do not know how they would have fared had they not used mergers, and because we have no basis for com- parison with nonmerging centrals of federations. However, insofar as this in- reased integration increased the earn- ings of these cooperatives, it contributed o the growth of local associations and influenced the number of associations desiring to affiliate with these federations. Role of Mergers in the Growth of Centralized and Local Associations The sample includes assets, sales, and merger data on 88 centralized, local, and bargaining associations which also manufactured and marketed some of their own products. For purposes of comparing the growth rates of merging and nonmerg- ing cooperatives, we have combined the centralized associations which did no bargaining for members and local asso- ciations which sold some or all of their products through sales federations. This was done because : 1 ) many of the asso- ciations classified as locals of sales fed- erations have developed their own market outlets for part of their output, and 2) some associations classified as centralized associations actually sell some of their [51 manufactured products through sales federations. Consequently, the difference between associations of these types, especially when they are quite large as they are in the sample, often is more ap- parent than real. Furthermore, the ex- tent of merger experience of cooperatives in these two classifications was not sig- nificantly different. Seven (37 per cent) of the 19 associations classified as local associations and 16 (32 per cent) of the 50 classified as centralized associations made mergers. Centralized associations which bargain for the sale of part of their members' milk are considered separately below be- cause they are significantly different types of associations. Table 25 compares the sales and asset growth of 23 merging and 46 nonmerging local and centralized cooperatives mak- ing manufactured products and engaged in fluid milk distribution but not engaged in bargaining. These 69 cooperatives en- joyed an average (unweighted) growth in sales of 130.6 per cent between 1945 and 1955. The 46 cooperatives which reported growing entirely internally grew by 62.8 per cent and the 23 growing partly by merger grew by an average of 266.2 per cent. If we compare the growth of only those cooperatives marketing fluid and manu- factured milk products, the merging firms clearly grew most rapidly: 219.4 per cent compared to 75.4 per cent. A similar comparison of these market- ing only manufactured milk products tells an even more striking story. Sales of the five merging cooperatives grew an aver- age of 434.8 per cent compared to 47.9 per cent for the 21 nonmerging coop- eratives. The growth of assets of merging and nonmerging cooperatives paralleled their sales growth. Again, the merging firms clearly outdistanced those growing en- tirely through internal expansion. Of course, the preceding comparisons are average relationships. Some non- ] Table 26. Distribution of Percent- age Increase in Sales Between 1 945 and 1955 of 23 Merging and 46 Nonmerging Cooperatives Per cent increase in sales 23 merging cooperatives 46 nonmerging cooperatives —33 toO 0-49 50-99 100-199 200-299 300-399 400-499 500-999 1,000-1,999 3 5 5 4 1 2 2 1 6 23 8 6 2 1 merging firms also grew quite rapidly and a few using mergers grew but little. Table 26 shows the number of coopera- tives growing by various percentages be- tween 1945 and 1955. Six nonmerging cooperatives actually experienced declines in sales between 1945 and 1955 whereas no merging co- operatives experienced such declines. Fully 37 (80.4 per cent) nonmerging cooperatives grew by less than 100 per cent, whereas only eight (34.8 per cent) of the merging cooperatives fell in this class. On the other hand, only three (6.5 per cent) nonmerging cooperatives grew by over 200 per cent compared to 10 (43.5 per cent) of the merging coopera- tives. The growth comparisons made here are in current dollars. Actually, whole- sale dairy prices increased about 60.3 per cent between 1945 and 1955. Thus cooperatives experiencing sales increases of less than 60.3 per cent actually de- creased in size during this period. This was true of 34 (74 per cent) of the non- merging cooperatives and only five (21.7 per cent) of the merging cooperatives. While there was considerable varia- tions in the sales growth rates within the merging and nonmerging groups, as well as between the groups, the sales means of the two groups are significantly different at the 99 per cent level. The asset means of the two groups are significantly differ- ent at the 99 per cent level for all but those cooperatives marketing only manu- factured products: these means are sig- nificantly different at the 95 per cent level. Bargaining cooperatives which owned some of their own processing and distri- bution facilities also used mergers. Twelve of the 19 cooperatives of this type grew in part through mergers. The sales of the merging firms increased somewhat more rapidly than those of the nonmerging cooperatives: 158.7 com- pared to 100.1 per cent. This difference did not prove statistically significant at the 95 per cent level. However, the assets of the merging cooperatives grew at a significantly faster rate: 302 per cent compared to 139 per cent. Mergers by these bargaining associa- tions were made mainly to achieve a greater degree of vertical integration, either into distribution or, more com- monly, into manufacturing. The much greater asset growth of the merging co- operatives reflects this fact. Comparisons of Internal and External Growth Above we have compared only the total growth of merging and nonmerging cooperatives. Because of their signifi- cantly greater growth rates, we might infer that the merging firms grew more rapidly because of their mergers. Discus- sions below of the apparent reasons and effects of these mergers suggest that such a causal relationship exists (pp. 55 ff.). However, one way of supporting statisti- cally this hypothesis is by separating the external (merger) and internal compo- nents of growth in order to see whether mergers accounted for this difference. In making these comparisons we have excluded the centrals of federated asso- ciations because their size is less likely to be explained by their mergers than is that of other types of associations in our [52 Table 27. Comparison of the Sales and Asset Growth of 35 Coopera- tive Dairies Between 1945 and 1955 with the Assets and Sales of Con- cerns Acquired by These Cooperatives During 1946—55 Values in actual dollars Values adjusted to 1955 price level* (000) (000) $266,539 537,616 271,077 66,827 24.65 $427,262 537,612 110,350 67,776 61.42 46,068 124,789 78,721 17,130 21.70 61,242 124,789 63,547 17,364 27.32 1945 Sales of 35 acquiring cooperatives . . 1955 Sales of 35 acquiring cooperatives . . Growth in sales, 1945-55 Sales of acquired concerns Per cent of growth due to mergers 1945 Assets of 35 acquiring cooperatives 1955 Assets of 35 acquiring cooperatives Asset growth, 1945-55 Assets of acquired concerns Per cent of growth due to mergers * See text. sample. The 35 merging cooperatives in the sample are those in table 25. The customary method used to divide growth into its internal and external components is to compare the size of con- cerns acquired during a certain period with the growth of the acquiring coop- eratives during the period. Such a com- parison appears in table 27. In making these comparisons, sales and assets were adjusted to 1955 values. 74 According to these comparisons, merg- ers accounted for 61.42 per cent of the sales growth of these concerns, and in- ternal growth for 38.58 per cent. The comparable asset figures are 27.32 per cent and 72.68 per cent. The preceding comparisons tell us nothing of the indirect effects of mergers on growth because they treat internal growth solely as a residual, i.e., the differ- ence between total growth and direct growth due to mergers. We will try to partially overcome these difficulties by using the following estimating proce- dure: First, we will estimate the internal growth rate of these concerns by assum- ing it to be the same as that of their non- merging counterparts (table 25). This was 3.5 per cent 75 for the entire period, or an annual rate of .33 per cent. Second, we will estimate the direct and indirect effects of mergers on growth by assum- ing that in addition to their direct effect on growth in the year of purchase, merg- ers are responsible for a part, propor- tional to their size, of all subsequent growth. For example, if in 1946 a coop- erative with sales of $900,000 merged with a concern with $100,000 sales, we will assume that the merged concern is responsible for 10 per cent of all subse- quent internal growth. In estimating the 74 An index of wholesale dairy prices was used to make these adjustments. Only current assets were adjusted to 1955 values. Fixed assets were not adjusted because no price index is available for making a satisfactory adjustment. Because we had no breakdown of current and other assets for all acquired and acquiring cooperatives, it was assumed that in all cases current assets repre- sented 50 per cent of total assets. 75 This figure differs from that in table 25 for two reasons. 1 ) It represents the aggregate sales growth of the 53 nonmerging cooperatives whereas that in table 25 is their unweighted average sales growth. 2) It is adjusted for the change in wholesale dairy prices between 1945 and 1955. [53] Chart 8. Estimated Internal, External, and Unexplained Components of Growth of Total Sales of 35 Cooperative Dairies Growing in Part by Mergers During 1946-55. 525 " 500 - ^^^^ Unexplained growth ^^^ 475 ^S^ ^^^^ External growth 450 Internal growth 425 A=Total sales in 1 945 adjusted to 1 955 price levels. B— A — Estimated internal growth (1 3.6 per cent of total growth). C— B = Estimated external growth (61 .9 per cent of total growth). D— C^Unexplained growth (24.5 per cent of total growth). 400 - D — Total sales. 1 1 1 Chart 9. Estimated Internal, External, and Unexplained Components of Growth in the Total Assets of 35 Cooperative Dairies Growing in Part by Mergers During 1946-55. Unexplained growth External growth Internal growth A Total assets in 1945 partially adjusted to 1955 price levels B A Estimated internal growth (66.5 per cent of total growth) C - B = Estimated external growth (32-2 per cent of total growth) D C Unexplained growth (1.3 per cent of total growth) D Total assets [54] indirect effects of mergers on growth we will assume the growth rate equal to that enjoyed by our sample of nonmerging cooperatives. For example, if a concern with sales of $100,000 was acquired in 1946, we will assume that its indirect contribution to growth amounted to $100,000 times .33 per cent compounded annually for the following nine years. Theoretically, by using the above pro- cedures, estimated internal growth plus estimated external growth should equal total actual growth during the period. If our estimated internal and external growth closely approximates actual growth of the merging cooperatives, we may infer that mergers explained the difference between the growth rates of our merging and nonmerging coopera- tives. Of course, if any "unexplained growth" exists (i.e., the difference be- tween estimated and actual), it could be due to various things including errors in basic data and estimating procedures. But one possibility is that the mergers themselves so added to the over-all effi- ciency of the acquiring cooperatives that they accelerated the acquiring coopera- tives' growth beyond that suggested by our estimates. Charts 8 and 9 show the estimated ag- gregate internal and external growth of the 35 merging cooperatives as indicated by the above procedures. Because adjusted sales of the nonmerg- ing cooperatives grew by 3.5 per cent, it is assumed the 35 merging cooperatives enjoyed an internal growth of from $427,000,000 in 1945 to $442,000,000 in 1955, or an increase of $15,000,000 (chart 8). The direct and indirect effects of the acquired concerns on growth dur- ing 1946-1955 resulted in an estimated external growth of $68,000,000. The esti- mated total growth of these concerns was $110,000,000. Thus, estimated internal growth accounted for 13.6 per cent and estimated external growth for 61.9 per cent of the growth of these cooperatives between 1945 and 1955. This leaves 24.5 per cent of their sales growth unexplained by our procedure. The estimates of asset growth gave the following results: estimated internal growth 66.5 per cent, estimated external growth 32.2 per cent, and unexplained growth 1.3 per cent of total asset growth between 1945 and 1955 (chart 9). The preceding comparisons indicate, especially in the case of assets growth, that mergers explain most of the differ- ence in the growth rates of the merging and nonmerging cooperatives in the sample. In other words, had these con- cerns not made these mergers, they would have grown at a much slower rate, per- haps about the same as that of the non- merging cooperatives in the sample. MERGER REASONS, METHODS, PROBLEMS, AND EFFECTS In addition to the preceding quantita- tive data on the extent and apparent effects of mergers on the growth of our sample of dairy cooperatives, we also ob- tained data on merger methods and some qualitative impressions as to problems, reasons, and effects of mergers. It should be emphasized that many of the answers involved the judgment of the persons filling out the questionnaires. Usually this was the manager of the acquiring cooperative, although often a number of persons obvioudy participated in providing the requested information. Reasons for Mergers Among Cooperatives Cooperatives merging with other co- operatives did so almost exclusively to increase the size of their operations. About half explicitly gave this reason and nearly all others cited reasons im- plying the same motive. They cited such factors as: increased membership, in- [55 creased size, elimination of overlapping procurement routes, and increased sup- plies of milk. These, of course, are rea- sons for growth, not reasons for growth by merger. Obviously the respondents felt that mergers provided the best means of growing to achieve this end. Methods Used in Mergers Among Cooperatives The cooperatives in our sample used the following methods in merging with other cooperatives. NUMBER OF METHOD MERGERS One cooperative bought the assets of another 18 One or more cooperatives merged into a new one 16 Other 1 Total 35 About half of the mergers among co- operatives involved the purchase of one cooperative by another with the mem- bers of the acquired cooperative joining the other. Most commonly the members of the discontinuing cooperative were paid with stock or some form of equity certificate of the acquiring cooperative. The purchase method most commonly was used in cases where the acquiring cooperative was considerably larger than the acquired cooperative. In cases where several cooperatives of roughly the same size were involved, the usual practice was for the merging coop- eratives to consolidate into a new asso- ciation. All but two of the 16 coopera- tives using this method were involved in mergers among three or more coopera- tives. In consolidations of this sort the usual procedure is for each member of the discontinuing cooperative to receive an equity in the form of stock or other- wise in the new association proportional to his equity in the discontinuing coop- erative. One cooperative in the sample sold its assets to a third party and its members joined the acquiring cooperative. Al- [ though we do not know the details of this merger, it apparently was more in the nature of a planned dissolution of one cooperative with an understanding that members would j oin another in the com- munity. Problems in Merging Cooperatives Cooperatives in the sample cited a variety of problems in bringing off their mergers. But as shown below, 22 out of 35 reported encountering no serious problems. TYPE OF MERGERS NUMRER OF ENCOUNTERED IN MERGERS MERGERS No serious problems 22 Displacement of management of merging cooperatives 13 Disagreement as to relative values of merging cooperatives 8 Conflicts between members of merging cooperatives 5 Displacement of directors of merging cooperatives 2 Other 3 Total 53* * Total exceeds 35 because some cooperatives gave more than one reason. This experience reflects, in part, the fact that usually when there are very- serious obstacles to mergers among co- operatives, they are not consummated. Those working with cooperatives in plan- ning mergers know only too well that many more mergers among cooperatives are proposed and discussed than succeed. The most frequently mentioned prob- lem in merging cooperatives is that aris- ing from the displacement of manage- ment of the discontinuing cooperative. In 13 mergers this was cited as a prob- lem. Managers of cooperatives contem- plating mergers are in a strategic posi- tion to prevent culmination of mergers which threaten their jobs. Directors and members usually must rely on manage- ment's advice as to the expected results of a possible merger on operating effici- ency and other matters. The next most frequently mentioned 56] problem was that of arriving at accept- able relative values of the merging con- cerns. This problem is most common in the consolidation of a number of coop- eratives. In only five cases were conflicts be- tween members of merging cooperatives cited as an obstacle to mergers. Such con- flicts might include anything from dis- agreements among members due to nationality or personality characteristics, to conflicts because members of one co- operative feel they are benefiting less from a merger than those of the other cooperative. However, the fact that con- flicts among members were mentioned so seldom suggests that this was not a serious obstacle to these mergers. One way of measuring the effects of membership objections to a merger is to determine how many members of ac- quired cooperatives joined the acquiring cooperative after the merger. In 21 of the 32 mergers on which we have this infor- mation, all members joined the acquiring cooperative. In nine of the 11 other cases at least 90 per cent joined. In the other two cases 20 per cent did not join the acquiring cooperative. These experiences reinforce the preceding findings that ob- jections of cooperative members were not a serious obstacle to these mergers. In only two cases was displacement of the directors of the merging cooperative cited as a problem. This probably reflects the fact that it is a common practice to include, at least initially, some or all of the directors of the discontinuing coop- erative on the board of the acquiring or new cooperative. Then directors do not have much to lose personally by a merger. Three cooperatives stated (as "other" reasons) that getting members to under- stand completely the reasons and details of the merger presented a problem, though not a serious one. As one manager put it : "Even a year after the merger has taken place we are still confronted with questions concerning how such a trans- [57 action was completed and what effect it will have on individual patrons." Effects of Mergers Among Cooperatives In all cases reported here, mergers im- proved the efficiency of the merging co- operatives, according to the persons fill- ing out the questionnaire. Two questions were asked to get information on this point : 1 ) Do you feel your mergers weak- ened your association in any way? 2) Do you feel your mergers made your asso- ciation a larger, more efficient and/or more stable association? In all cases the respondents answered "no" to the first question and "yes" to the second. Those explaining their reasons for saying "yes" to the second question made such comments as : "resulted in in- creased membership and sales," "it took us out of the red," "resulted in improved sales efficiency, better capital use, and cut management costs," "eliminated un- healthy competition between plants." Even after recognizing that most re- spondents had participated in the merger negotiation and therefore could not be completely objective in assessing their results, the unanimity of the response to the above questions strongly suggests that the mergers were successful. They in- creased the procurement, production and marketing efficiency of the cooperatives involved. Reasons for Acquiring Noncooperatives Acquiring cooperatives gave a number of reasons for making their 87 noncoop- erative mergers. Ususally they gave more than one reason for each merger. Sig- nificantly, in 49 cases they gave as a motive the desire to prevent others from acquiring this outlet. Apparently those giving this reason were often in the fluid milk business previous to the acquisition, often as a bulk supplier to the acquired concern. WHAT WERE YOUR PRIMARY REASONS FOR ACQUIRING THE ABOVE NONCOOPERATIVE BUSINESS? To prevent another concern from buying this outlet 49 Cheaper to buy fluid milk outlet than to develop your own 35 Increase bargaining power of your association 22 Cheaper to buy production facilities than to build your own 21 Increase membership of cooperative 10 Other reasons 11 No answer 4 Total 152* * Total exceeds 87 because most checked more than one reason. They evidently feared that if the busi- ness was sold to someone else they would lose this outlet for their milk. Because this motive loomed so large, it may ex- plain the high correlation, mentioned above, between cooperative merger activ- ity and the merger activity of large non- cooperatives. Many of the merging co- operatives may have been reacting to actual or threatened merger activity of others in their market. Another frequently mentioned reason for mergers was the feeling that it was cheaper to buy fluid milk outlets than to develop them through internal expansion. This reasoning is consistent with that pre- sented above (page 43) concerning the difficulties of growing in market struc- tures characterized by relatively few firms and little product differentiation. The third most frequently mentioned reason was the desire to increase bar- gaining power. Those citing this reason may have had a number of things in mind in giving this answer. Most probably they were thinking in terms of improving their competitive position, either by increasing their own strength through increased volume or greater integration, or by buy- ing out a competitor. The fourth most frequently cited rea- son for mergers was that it was cheaper to buy production facilities than to build them. Strictly interpreted, this answer im- plies that these mergers were made be- [ cause the physical facilities were a good buy compared to the cost of new or ex- panded old facilities. In 10 cases acquisitions were made, in part, to increase the membership of the cooperative. This answer implies that noncooperative mergers were used as a means of obtaining cooperative members. In other words, sometimes the best way of expanding membership, and thereby intake volume, is by buying out a non- cooperative rival. As shown below, in cases where former suppliers of nonco- operatives were permitted to join the acquiring cooperative, the great majority of the farmers joined the cooperative. Thus, the experience of these acquiring cooperatives suggests that acquisitions of noncooperatives can be an effective means of increasing membership. Problems Encountered in Acquiring Noncooperatives It is significant that cooperatives re- ported encountering fewer problems in acquiring noncooperatives than they did in merging with other cooperatives. In 68 of the 87 acquisitions of noncooperatives the cooperatives reported that they en- countered no serious problems. In only 23 cases (25.3 per cent) did they report encountering one kind of problem or another. This compares with 84 per cent in the case of mergers among coopera- tives. WHAT PROBLEMS DID YOU ENCOUNTER IN MAKING PARTICULAR PURCHASES? No serious problems 68 Inefficient personnel of purchased firm. ... 5 Financing problems 5 Loss of customers after purchase 4 Some suppliers would not join after purchase 2 Resentment of management of selling concerns 1 Resulted in excess capacity 1 Other 2 No answer 3 Total 91* * Total exceeds 87 because some gave more than one answer. 58] In five cases, the acquired concern was In another 32 cases, loans were ob- staffed by inefficient personnel, accord- tained from banks for cooperatives and ing to the acquiring cooperative. This is in another 16 cases from commercial essentially a short-run problem, however, banks. This method, like most other non- since the cooperative should have been equity financing methods, was used in able to replace such persons after opera- conjunction with revolving fund or stock tions got underway. Of course, this could financing. be a serious problem if the cooperative In 27 cases, the purchase was made, at acquired a very large noncooperative op- least in part, out of reserves. Most often erating in fields new to the cooperative, this method was used in making the In this event the cooperative's manage- smallest acquisitions, ment might be dependent upon the staff In 20 cases, time payment plans were of the acquired concern for some time. worked out with the seller. Although not Financing problems did not present as frequently used as some other methods, much of a problem in acquiring non- this was an extremely important method cooperatives. They were cited in only five of financing the largest acquisitions. Per- cases. sonal interviews with some of the coop- The frequency with which various eratives involved indicates that this was methods of financing were used is as fol- one of the big advantages of acquiring a lows: going concern. method of number of Loss of customers of acquired concerns financing times used was cited as a problem m only four acqui- Member revolving fund 50 sitions. This suggests that acquiring non- Borrowed from bank for cooperatives.. 32 cooperatives may be an effective means Paid cash out of association reserves. . . 27 of obtaining and keeping a market outlet Worked out time payment plan with r -n t>i i • i n ork lor milk. Ine extent to which customers seller 20 Borrowed from commercial banks .... 16 were retained is one important criterion Sale of stock to members 8 of the success of a merger designed to Sale of bonds to members 1 buy market outlets. To get information on Total 154* tn i s matter, acquiring cooperatives were — — — ; asked: "If the purchased concern was a '"Total exceeds 87 because most acquiring a -j -n *.i * i. i_ .... „ , a. fluid milk outlet, about what percentage cooperatives reported using more than one p _. _ r method, by volume ot customers did you keep after the purchase?" The distribution of As shown above, cooperatives usually responses i n the case of 61 acquired fluid used more than one method. Most often, milk outlets was an fo n ows: financing involved the use of members' revolving funds. This simply indicates per cent of customers i L .-, . . j , , L J , NUMBER OF ACQUIRED RETAINED AFTER THE that this is the method most commonly ^cooperatives sale purchase used by these cooperatives to obtain their 30 100 equity capital. Cooperatives using this 14 90-99 method of financing frequently used it in 6 80-89 conjunction with some other method. For 70-79 example, they might get a loan from a 3 50-59 bank for most of the original purchase 1 25 price and then gradually pay it off 1 15 through the revolving fund method of 6 No answer financing. The above discussion also ap- 77 plies to the eight cases where sale of com- mon stock was used, in part, to finance This experience indicates that most mergers. fared very well in retaining customers. [59] Only five lost over 20 per cent of their customers. In the latter cases the merger may have failed in its objective. Some cooperatives reported going to considerable lengths in making the transi- tion from noncooperative to cooperative ownership. In fact this might represent a study in itself. In Appendix C is repro- duced a letter which one cooperative sent to all retail customers of the acquired concern. Others reported contacting each patron personally to explain the pur- chases. Still another reported operating the acquired concern under its old name without informing customers of the change in ownership. Only two cooperatives reported en- countering serious problems in getting former farm suppliers of the acquired noncooperative to join the cooperative after the purchase. To get specific infor- mation on their experience in this re- spect, cooperatives acquiring noncobp- eratives were asked two questions: 1) Did you permit farmers supplying the acquired concern to join your associa- tion? 2) What per cent joined? In 74 noncooperative mergers, mem- bers were permitted to j oin the acquiring cooperative. 76 In only eight cases were they not. Six of these involved acquisi- tion by centrals of federated cooperatives which prohibit direct membership of farmers in the central. Thus, former sup- pliers would have to join a local unit of the federation in order to sell through the central. In one of the other cases not per- mitting former suppliers to join the co- operative, the acquired noncooperative was a fluid milk distributor located some distance from the cooperative. After the acquisition, the cooperative supplied these routes from its processing plant. Because the former suppliers were located outside the cooperative's procure- ment area it was not feasible to permit them to become members. Of the 48 acquisitions on which we have this information, the following per- centages of former suppliers joined the cooperative after the merger : PER CENT OF FORMER SUPPLIERS JOINING COOPERATIVE AFTER NUMBER OF MERGERS MERGER 22 100 19 90-99 80-89 3 70-79 2 60-69 2 20 48* * In 13 cases the acquired concern was al- ready being supplied by the cooperative or its members; in 13 other cases we have no infor- mation on their experience in retaining sup- pliers. This experience does not appear to be quite as favorable as that of mergers among cooperatives (see above). In 66 per cent of the cases of mergers among cooperatives all members joined the ac- quiring cooperative and in 94 per cent of the cases 90 per cent or more joined. In the case of noncooperative acquisitions, the comparable figures are 46 per cent and 85 per cent. It should be noted, how- ever, that, in the case of mergers among cooperatives, the major motive of the acquisition was to increase volume by in- creasing membership, whereas, in the case of noncooperatives, this usually was of only secondary importance. As noted above, of the reasons given for acquiring noncooperatives, increasing membership was mentioned in only 10 of the 87 ac- quisitions. Comparison of Merger Activity of Large Cooperatives and Noncooperatives The large cooperatives in the sample used mergers less extensively in their growth than did large noncooperative dairies during 1946-1955. Whereas the nine cooperatives with sales of between $10,000,000 and $20,000,000 in 1945 averaged two mergers each (table 19), noncooperatives in this size class aver- This information was not reported in three cases. [60] aged 16.8 each (table 28). In fact, Fore- most Dairies, which was in this size class in 1945, made 80 recorded acquisitions with combined sales of over $340,000,- 000. As noted above, the 35 cooperatives and 87 noncooperatives acquired by all the cooperatives in the sample had com- bined sales of just under $100,000,000. Thus, Foremost's merger activity alone tripled that of our 102 large cooperatives combined. The four cooperatives with 1945 sales of between $20,000,000 and $100,000,- 000 averaged 6.3 mergers each during 1946-1955. The three noncooperative dairies in this size class averaged 24 each. The five noncooperative dairies which had sales exceeding $100,000,000 in 1945, averaged 49 mergers each during 1946-1955. There were no cooperative dairies in this size class in 1945. The preceding facts demonstrate that cooperatives with sales exceeding $10,- 000,000 in 1945 used mergers much less frequently in their growth during 1946- 1955 than did noncooperative dairies of comparable size. CONCLUSIONS ON DAIRY MERGERS Dairy cooperatives as a whole have achieved increasing importance since the early 1920's. Whereas, in 1925-1926, co- operatives participated in marketing about 21 per cent of all dairy products, by 1954-1955 they participated in mar- keting 33 per cent. It should be noted, however, that fully 40 percent of the latter year's sales were accounted for by associations whose principal function is to act as bargaining agents for farmers in selling to noncooperative dairies. But while cooperatives as a whole ap- pear to have done very well, large coop- eratives do not seem to have fared as well as large noncooperatives. For example, in 1924 the country's three largest dairy co- operatives had sales about 48 per cent as great as the three largest noncoopera- tives. But by 1933 this percentage had dropped to 24 per cent, by 1945 to 18 per cent, and by 1955 to 15 per cent. Much of the growth of large noncoop- eratives was achieved through their many mergers. Between the early twenties and 1946, over half of the combined asset growth of the six largest noncooperatives resulted from merger. Since 1946, they have continued to use mergers exten- sively. Mergers have been common through- out the dairy industry, not just among large noncooperatives. During 1940- [61 1955, between 100 and 200 dairy mergers were reported annually. About 20 per cent of these were by the country's eight largest noncooperative dairies, about 60 per cent by other noncooperatives, and 20 per cent by cooperative dairies. An analysis of the growth of a sample of 102 large cooperative dairies indicates that, between 1945 and 1955, nearly half grew in part by merging with other cooperatives and/or noncooperative dairies. On the average, cooperatives in the sample made 1.2 mergers each. How- ever, those cooperatives with 1945 sales exceeding $10,000,000 made an average of 3.3 mergers each. Most often the acquired concerns were small. Only about one-third of the ac- quired cooperatives and one-tenth of the acquired noncooperatives had sales be- tween $1,000,000 and $10,000,000. Some of those cooperatives not merg- ing during 1946-1955 had considered doing so; about 12 per cent had con- sidered merging with other cooperatives and 11 per cent had considered acquiring noncooperatives. Of those actually mak- ing mergers during 1946-1955, 38 per cent reported that they had considered merging with additional cooperatives but had not done so, and 42 per cent re- ported similar experiences with nonco- operatives. ] Table 28. Merger Activity of Medium and Large Noncobperative Dairies During 1946-55 Dairies and size classes 1945 sales Number of acquisitions 1946-55 $10-19.9 Million Abbotts Dairies * * 12.8 14.0 * 17.9 57.9 79.3 * 125.1 168.8 114.8 459.5 633.0 8 Bowman Dairy 12 Foremost Dairies 80 Knutson Creamery 1 United Milk Products Whiting Milk Company Average for size class 16.8 $20-99.9 Million 27 Fairmont Foods 22 23 24 Beatrice Foods . 74 Carnation 41 Pet Milk 11 Borden 89 National Dairy Products . 30 Average for size class 49.0 Source: Merger data were derived from the same sources as Table 18. * Public information is not available of the sales of this concern in 1945. However, the author believes its sales in 1945 were within the range of this size class. Those cooperatives growing by merger during 1946-1955 clearly grew more rapidly than those growing entirely in- ternally. For example, of 46 cooperatives handling manufactured and fluid milk, the sales of 18 growing in part by merger increased by 219.4 per cent, whereas sales of the 25 growing entirely internally in- creased by 74.4 per cent. The comparable asset growth figures were 390.9 per cent and 161.1 per cent. When adjustments are made for changes in the price level, it becomes ap- parent that 64 per cent of the nonmerging cooperatives actually declined in size during 1946-1955. Only 17 per cent of the merging cooperatives failed to grow during this period. Statistical comparison of the growth experiences of merging and nonmerging cooperatives supports the hypothesis that mergers explained most or nearly all of the differences in the average growth rates of merging and nonmerging coop- eratives. Comparison of the merger activity of the cooperatives in our sample with non- cooperatives of similar size indicates con- clusively that during 1946-1955 the non- cooperatives used mergers much more extensively in their growth than did the cooperatives in our sample. In analyzing the qualitative responses of merging cooperatives to a series of questions concerning their merger ex- periences, it seems evident that their [62] mergers contributed significantly to their over-all efficiency. Our findings teach these lessons : Many cooperatives have successfully used mergers in their growth. Merging coop- eratives grew much more rapidly than the nonmerging cooperatives. In fact, most of the nonmerging cooperatives actually decreased in size between 1945 and 1955. Therefore, insofar as growth is an indicator of cooperative success, these findings support the hypothesis that merging dairy cooperatives are much more successful than nonmerging ones. Thus, while there may be practical ob- stacles to cooperative mergers, many co- operatives must overcome these obstacles if they are to survive and meet the chal- lenge of today's changing industrial en- vironment. APPENDIX A NATURE OF SAMPLE AND SAMPLING PROCEDURES ON DAIRY MERGERS The author originally had intended sampling merger activity by dairy co- operatives of all sizes. For this purpose, questionnaires were sent to approxi- mately one-third of all dairy coopera- tives in the country. However, the re- sponse by small cooperatives to this ques- tionnaire was very poor. Consequently, it was decided to sample merger activity by cooperatives with annual sales of $1,000,000 or more. The universe composing cooperatives of this size consisted of all dairy coop- eratives with sales of $1,000,000 which were listed in the Yearbook and Direc- tory of Farmer Cooperatives, published by the Cooperative Digest, in 1951, plus several which were not listed in this size class by the directory, but were known to have sales exceeding $1,000,000 in 1950. Cooperatives which were listed solely as bargaining associations, that is did not own any facilities for manufacturing or distributing milk, were excluded from the universe. The universe so constructed consisted of 213 cooperatives. An original questionnaire was sent to all these cooperatives and one follow-up was sent to those not responding to the original questionnaire. Three question- naires were returned with the notation that the addressees were no longer in business; another five were returned marked as "unclaimed" by the post- master. The latter addressees were also assumed to have discontinued business. Six questionnaires were returned with the notation that the cooperatives ad- dressed had discontinued operations be- cause they had merged with other co- operatives. Twelve other questionnaires were re- turned which indicated that the respond- ing cooperatives were solely bargaining associations. These were not part of the universe we were trying to sample. There were also nine bargaining associations among the nonresponding cooperatives if bargaining cooperatives represented the same percentage of these as of re- sponding cooperatives. Consequently we might assume that our original universe of 213 included 21 bargaining associa- tion and 192 operating cooperatives. If we make this assumption, our 102 usable questionnaires, the six coopera- tves which had discontinued business due to mergers, the three which have dis- continued business, and five which are assumed to have discontinued business, represent 60.4 per cent of the marketing dairy cooperatives with sales of $1,000.- 000 or over in 1950. The author estimates that the universe of 192 cooperatives operating in 1950 had combined sales of $1,155,000,000 that year. This estimate is based on the information received from returned questionnaires plus the sales information given in the Yearbook and Directory. This sales volume represented 56.8 per cent of the gross volume of all operating [63] cooperatives in 1949-1950, as reported by Anne L. Gessner, Statistics of Farmers Marketing, Purchasing and Service Cooperatives, 1950-1951, Coop- erative Research and Service Division, F.C.A., March 1953. Thus while our sample was not drawn from the total population of 2,008 dairy cooperatives operating in 1949-1950 (as given in Gessner, Ibid.), the 192 coop- eratives sampled accounted for a large percentage of total sales. The responding cooperatives had com- bined gross sales of $750 million, or about 37 per cent of the total sales of all dairy cooperatives in 1949-1950. Accuracy of Merger Information A check of the merger information sup- plied by our respondants with other sources indicates that our respondents did not seriously understate their actual merger activities (Appendix B). Only two of the 58 cooperatives in our sample which reported making no merg- ers appeared to have done so. These two apparently acquired five noncobperative dairies. However, in the growth compari- sons in the text, we have included these two cooperatives among those not mak- ing mergers. Comparisons with our secondary sources indicates that the 44 coopera- tives in our sample reporting mergers, acquired at least 39 cooperatives rather than 35 as they reported and acquired at least 97 noncobperatives rather than 87. This under-reporting of merger experi- ence probably has not seriously affected the accuracy of our results because the unreported mergers apparently involved small businesses. APPENDIX B ESTIMATED ACCURACY OF SECONDARY DATA OF MERGERS BY DAIRY COOPERATIVES Cooperative dairy merger statistics used in part III and in table 18 were de- rived entirely from secondary sources. Data on mergers among dairy coopera- tives were derived mainly from the co- operative discontinuance file maintained by Farmer Cooperative Service of USDA; 81.3 per cent came from this source and the rest from other secondary sources. We can obtain an indication of the completeness of data from these sources by comparing them with those received from the mailed questionnaire sent to a sample of dairy cooperatives. As noted in Appendix A, this questionnaire pro- vided information on the merger experi- ence of 102 dairy cooperatives. These respondents reported merging with 35 other cooperatives and 87 noncobpera- tives during 1946-1955. According to information from the Farmer Cooperative Service discontinu- ance file and other secondary sources (hereafter referred to as our general merger file), these 102 cooperatives u merged with 30 other cooperatives. How- ever, nine of the 35 mergers reported by our questionnaire respondents did not appear in our general merger file, and four which appeared in the general file were not reported by our respondents. Our 102 responding cooperatives therefore merged with at least 39 other cooperatives instead of 35. Thus our gen- eral file, which reported only 30 dairy co- ' operative mergers, understated actual co- operative mergers by these cooperatives by at least 23 per cent. v If our general file data on mergers by all dairy cooperatives are as complete as they are for our sample of 102 coopera- tives, there were at least 247 mergers in- volving dairy cooperatives rather than 190. It should be noted that those mergers * [64] not appearing in our general file were all of small concerns. All 11 of the merg- ers involving cooperatives with sales over $1,000,000 appeared in the general file. This suggests that this source includes very complete information on mergers among large dairy cooperatives. Our sample of 102 dairy cooperatives reported acquiring 87 noncooperative concerns during 1946-1955. According to our general file, these 102 coopera- tives acquired 70 concerns. However, 32 of the acquisitions reported in our ques- tionnaire did not appear in our general file, and 15 appearing in our general file were not reported in our questionnaire. Our 102 respondents therefore acquired at least 102 noncooperatives. Thus our general file on dairy cooperative mergers with ioncooperatives understate actual merger activity of these concerns by at least 31 per cent. If our general file on mergers by all dairy cooperatives understates actual mergers by the same percentage, dairy cooperatives actually acquired at least 468 noncooperatives instead of the 321 reported in this file. It should be noted that all of the merg- ers reported in our questionnaire but not found in our general file involved small noncooperatives. All 10 acquisitions re- ported in our questionnaire involving noncooperatives with sales over $1,000,- 000 were reported in the general file. The preceding comparisons suggest that our general file is a good source of information on cooperative acquisitions of large cooperatives and noncoopera- tives. It is also a quite complete source of mergers involving smaller cooperatives. Possibly we have records of as many as half of the small cooperative and non- cooperative acquisitions. APPENDIX C SAMPLE LETTER AN ACQUIRING COOPERATIVE SENT ALL OF THE RETAIL CUSTOMERS OF THE NONCOOPERATIVE CONCERN IT ACQUIRED Dear Customer : Because of the tremendous growth of the communities which we serve, we find our plant facilities entirely inadequate to take care of our expanding business. The necessary outlay for buildings and ma- chinery to take care of our needs would be very costly, and after much thought we decided to sell our business. We have been using many Cooperative products for some time, so naturally we preferred that they be the ones to buy our business. They have a full line of the highest quality dairy prod- ucts, produced in their new modern plant under the supervision of college trained laboratory technicians. The milk all comes from local dairy farms, which are also inspected and supervised by highly trained field men. We want to sincerely thank you for the patronage you have given us in the past, and want you to know that we will continue to operate our dairy bar. The route man who has served both you and [our] dairy so well in the past will continue to serve you for Cooperative. He will appreciate your continued patronage. Yours very truly, (Name of Acquired Noncooperative) [65] ACKNOWLEDGMENT I wish to record my gratitude for the generous help given me in this study by cooperative managers, personnel of sev- eral Land Grant Colleges, several staff members of the Berkeley Bank for Co- operatives, and many rank and file co- operative members. I am especially in- debted to the staff of the Farmer Coop- erative Service, including Dr. Joseph G. Knapp, Kelsey G. Gardner, Donald Hirsch, Anne Gessner, Martin Abraham- sen, Kenneth Samuels, and Homer Pres- ton. Professor Harlow Halvorson of the University of Wisconsin was very helpful in working up the statistics presented in part III. Without the generous coopera- tion of those interested in my work, I could not have completed this study. This acknowledgment should in no way be in- terpreted to imply that anyone but the author is responsible for the accuracy of the statements and conclusions presented in this monograph. Consider!)*^ Future in Agricultural Economics Agricultural economics applies SCIENCE to the BUSINESS OF FARMING ... to the marketing of farm products, to the use of agri- cultural and range resources. If agriculture is to continue as an important segment of our na- tional economy, farmers must be adequately trained in the business of farming. The University of California's course of study in agricul- tural economics is a step toward that goal. The curriculum . • . presented on the Davis campus, places major emphasis on Farm Management . . . but also provides instruction in Marketing, Co-operative Marketing. Agricultural Finance, Policy, and related subjects. Supplementary work may also be taken in such branches of agriculture as Agronomy, Animal Husbandry, Pomology, Agricultural Engineering, and the like. The faculty ... is comprised of trained, experienced economists, many with national and international reputations in their fields. The staff is active in service and research work in all of the Western States. Job opportunities . . . can best be understood by pointing to positions now occupied by graduates. The largest percentage are farmers. Other lines of endeavor include: Farm Managers ■ Credit work • Farmer Organizations Marketing Organizations • Agricultural Extension work State and Federal Departments of Agriculture work College teaching and research • High school teaching For more information: Write to the Department of Agricultural Economics, University of California, Davis. or: See your University of California Farm Advisor for college entrance requirements.