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Abstract
This report provides information on consolidating critical balance sheet components during cooperative mergers. It discusses the implications of combiningassets and liabilities and provides information and examples on various meth-ods of consolidating member equities. Several case studies of cooperatives thathave merged are included. They provide actual examples on how equities werecombined during mergers, consolidations, and acquisitions.
Key Words: Merger, plan, equity, assets, liabilities
Consolidation of Balance Sheet ComponentsDuring Cooperative Mergers
James J. WadsworthDavid S. ChesnickAgricultural EconomistsU.S. Department of AgricultureRural Business and Cooperative Development Service
RBCDS Research Report 139
March 1995
Cooperatives or cooperative leaders studying merging or in the midst of merg-ing are likely to confront some difficult issues when planning to consolidatemajor balance sheet components-assets, liabilities, and equity. This reportdescribes the implications and presents information and examples on methodsfor consolidating these important financial elements.
This information was obtained from: (1) literature by noted authors on coopera-tive mergers; (2) intra-agency development of examples and relevant informa-tion; and (3) case studies of several fanner cooperatives recently involved inmergers.
This report is intended to aid cooperative leaders and others interested in (a)better understanding financial aspects involved in mergers, and (b) developinga plan to combine major balance sheet components for the merger, consolida-tion, or acquisition being considered.
The authors thank the six cooperatives that participated as case-study subjects.Their contributions were essential for this report.
For brevity, the term “merger” is used throughout the report rather than specify-ing merger, consolidation, and acquisition in every instance.
The portions of this report that refer to the tax implications of mergers do notrepresent official policy of the U.S. Department of Agriculture, the InternalRevenue Service, the U.S. Department of the Treasury, or any other govem-ment agency. Hence, this report is not providing tax recommendations.Cooperatives studying or interested in tax issues of mergers should seek professional/legal tax advice.
Contents
Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Consolidating Balance Sheet Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Assets and Liabilities ....................................................................................... 2
Assets ....................................................................................................... 2
Liabilities ................................................................................................... 4
Member Equities ............................................................................................... 4
Allocated Equity ......................................................................................... 5
Unallocated Equity..................................................................................... 5
Equity Redemption Plans ......................................................................... 6
Alternatives for Consolidating Equity ................................................................. 6
Examples-Hatfield, et al. Report ............................................................ 6
Immediate Payoff .............................................................................. 6
Delayed Payoff .................................................................................. 6
Prorate Old Equity ............................................................................ 7
Reassignment to Unallocated Reserves .......................................... 8
Equity Reevaluation .......................................................................... 8
Base Capital Plan ........................................................................... 10
Handling Inactive Patrons ............................................................... 10
Other Alternatives ................................................................................... 11
Transfer Stock ................................................................................. 11
Exchange Stock ............................................................................. 11
Group Old Equity ............................................................................. 11
Equal but Weighted Grouping ......................................................... 13
Percentage-of-All-Combined Equities ............................................ 14
Acquisitions ............................................................................................ 15
Summary ................................................................................................ 16
ii
Contents
Cooperative Examples of Combining Equity .................................................. 16
Merger-Different Size and Strength ..................................................... 16
Consolidation-Different Size and Strength ........................................... 17
Acquisition 1 -Different Size and Strength ............................................ 17
Acquisition 2Cimilar Size and Strength ............................................... 17
Recent Case Study Examples ................................................................ 18
Case Study I-Cooperatives 0 and P ............................................ 18
Case Study II-Cooperatives Q and R ........................................... 20
Case Study III-Cooperatives S and T .......................................... 20
Case Study IV-Cooperatives U and V .......................................... 22
Case Study V-Cooperatives W and X .......................................... 22
Case Study VI-Cooperatives Y and Z .......................................... 23
Summary ............................................................................................... 23
Other Financial Issues ................................................................................... 24
Evaluating Equity ................................................................................... 24
Tax Considerations ................................................................................ 24
Summary and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
References . . ..*.............*.................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Appendix Adlossary of Terms/Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Appendix B-Case Study Survey Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Highlights
Cooperative leaders pursuing merger will benefit by developing and following anorganized plan to carry them through the process. Part of this plan entails thecareful study of the characteristics and structure of the participating coopera-tives’ assets, liabilities, and equity. Major questions need to be answered per-taining to those structures:
l What are the assets, what will be needed, and what are they worth?
l How should assets be evaluated (book or appraised value)?
l How do debt-to-asset ratios compare?
l Must assets be sold to retire debt?
l Are liabilities at similar levels and structured the same?
l What types of equities do the cooperatives have?
l What are the redemption plans?
l Are the cooperatives current in redeeming equity?
l What alternatives are available for consolidating member equities?
l What redemption plan will best suit the unified cooperative?
These and other questions should be addressed in the merger plan. Doing sowill require a thorough examination of each cooperative’s balance sheet andfinancial characteristics. Every merger is different depending on the attributes ofeach cooperative, what precipitated the merger, and what each cooperative hasto offer a unified organization.
Handling member equity is, perhaps, the most difficult financial issue in a merg-er. Member investment needs to be respected and protected. Alternatives forcombining equity must take that into consideration.
Not all alternatives for combining equity provide complete member equality.Develop alternatives and assess attributes of each to narrow the field to themost suitable alternative given the conditions and the overall situation of the par-ticipating cooperatives.
This report contains 21 alternatives or examples for combining equity. Elevenare described in general. Ten are examples from cooperatives that participated
iv
in a merger. Cooperatives considering merger may use them to help develop afield of alternatives.
Cooperatives usually don’t face the same problems in acquisitions as they do inmergers. While member financial interests and their patronage still must berespected, the acquiring cooperative usually dictates most actions taken to com-bine assets, liabilities, and member equity, especially if the cooperative beingacquired is financially weak. In any event, acquisitions are gaining in popularitygiven the relative ease by which the applicable transactions can be completed.
Cooperatives considering merger must work to let members know that theirinterests are being represented and protected and that their financial stake in theunified cooperative is important.
The new or unified cooperative should emerge with an equity capitalization andredemption program that closely adheres to the “user-owned cooperative princi-ple-the equity structure should reflect current patterns of usership. Cooperativeleaders should adhere to that precept in developing the merger plan.
V
Consolidation of Balance Sheet ComponentsDuring Cooperative Mergers
James J. WadsworthDavid S. ChesnickAgricultural Economists
B alance sheet characteristics of cooperativesinvolved in a merger are rarely identical.
Problems often arise when organizations with differ-ent depreciable assets, liabilities, types of equity, andequity redemption programs attempt to combinetheir assets and equities into a single organization.
Asset evaluation, liability realignment, andequity transfer during cooperative mergers are deli-cate issues and must be handled in an equitable ormutually agreeable manner.
In a merger, one or more business organiza-tions absorb another firm. The survivor maintainsits identity. Many of its organizational features areoperated on an expanded basis, given its increasedsize and capacities. Consolidation combines two ormore business organizations into a new organiza-tion. In an acquisition, the assets of one cooperativeare purchased by another.
This report examines and clarifies the alterna-tive methods for evaluating and consolidating criti-cal balance sheet components during mergers, con-solidations, and acquisitions. The report providesreferences for cooperatives involved in planningand negotiating a merger, and/or for those interest-ed in the types of financial structural changes thatresult from the consolidation of cooperative balancesheets during mergers.
Mergers result in expanded assets, realignedliabilities, and transferred and consolidated memberequities. Cooperative members involved in mergershave a personal stake in the methods used to evalu-ate and consolidate these critical financial elements.
This report has seven sections. The first is ageneral plan for consolidating major balance sheetcomponents during a cooperative merger. The sec-ond describes the appraisal of cooperative assetsand handling liabilities, while the third analyzesand describes alternatives for consolidating mem-ber equities-some summarized from another liter-ature source and some developed.
The fourth section provides some generalalternatives for consolidating equity, examples bor-rowed from other literature and other developedexamples. The fifth section includes case studies ofcooperatives that have merged, some originatingfrom a past study and some from recent case stud-ies. Section six discusses some financial issues per-taining to merger. Section seven summarizes thereport and discusses implications of the findings.
CONSOLIDATING BALANCE SHEETCOMPONENTS
Cooperative leaders contemplating or activelypursuing merger will benefit by developing andfollowing an organized plan that will carry the par-ticipants through the merger process. A well-developed plan for merger indicates steps to followand the components or elements in each step.1
Part of the plan should include strategies forconsolidating the balance sheet components of theparticipating cooperatives. A joint merger or studycommittee evaluates all implications of consolidat-ing the participants’ balance sheets and providesrecommendations to the boards of directors aboutthe most suitable strategies for completing the task.
Initial phases of those studies often involveoutside consultants. Later phases of merger propos-als usually involve a range of complex issues thatrequire the outside assistance from legal counsel,accountants, and occasionally professional media-tors.
This part entails careful study of the character-istics and structure of participants’ assets, liabili-ties, and equity (figure 1). The figure portrays the
1 See Swanson (ACS Research Report 43-MergingCooperatives: Planning, Negotiation, and Implementation)for general information, guidelines, and step-by-step pro-cedures for merging cooperatives.
consolidation of assets, liabilities, and equities oftwo cooperatives into a single organization.
The variations and implications of consolidat-ing these major financial elements can be compli-cated. To limit disruption to the merger process,financial consolidations should be handled careful-ly. In proceeding with merging these components, anumber of questions, such as those included in fig-ure 1, need to be answered in their regard.
Successfully answering these and other moredetailed questions requires a thorough understand-ing of the characteristics of each merger partici-pant’s financial statements. Thus, financial state-ments must be carefully examined by the mergercommittee.
The final plan or strategies for consolidatingthe financial elements may vary according to thestatus of the cooperatives contemplating merger.For example, cooperatives with a similar financialstructure and similar financial strength and perfor-mance will find it relatively easy to consolidatefinancial elements.
On the other hand, consolidating the financialelements of cooperatives with significantly differ-ent structures and financial strengths may be moredifficult. If one cooperative is financially strong andthe other in danger of bankruptcy, the strongercooperative may feel that the equity position of theweaker one should be adjusted in relation to cur-rent financial predicament in terms of debt and theprobability of future losses without the merger.
Other circumstances may require special plansfor financial consolidation-(a) the cooperativeshave similar levels of financial success, but one isrelatively larger than the other, (b) the cooperativeshave similar financial performance, but one hassuperior operating assets in superior locations, (c)the cooperatives have a similar financial structure,but one owns property with windfall potential, (d)the cooperatives have different types of equityinstruments or revolvement periods vary, etc. Suchdifferences must be considered when planning theconsolidation of financial (balance sheet) compo-nents of merging cooperatives.
A merger plan must examine possible taximplications associated with the various aspects offinancial consolidation. Different methods for con-
2
solidating financial elements may have different taximplications. This may be especially true whencooperatives are merging across State lines, orwhen asset disposal returns windfall profits.
The mission of a merger is to create synergies,and at the very least, a financially and operational-ly sound cooperative that enhances the economicwell-being of owner-members. A merger shouldproduce greater economies of scale, less businessduplication, a greater resource base from which tooperate, and an expanded member base from whichto derive and achieve broader market penetration,greater leadership abilities, and expanded capital-ization.
The merged cooperative also has an opportu-nity for a new beginning by following importantcooperative financial principles and practices,regardless of whether or not the participants com-pletely followed them before the merger.
In other words, the merged organization has arenewed opportunity to improve or continueadherence to the “user-owned” cooperative princi-ple regarding member capitalization, financial poli-cies, and equity redemption. The members musthave a substantial financial stake in their coopera-tive and the equity structure should reflect currentpatterns of usership.
ASSETS AND LIABILITIES
AssetsAs cooperative leaders examine the value and
quality of assets involved in a merger, questionsinvariably arise (figure 1):
(1)(2)(3)
(4)
(5)
(6)
What assets (capacity) will be needed?What are the fixed assets worth?What depreciation, writeoff, or salvage valua-tion methods are used? Is there windfall poten-tial?Should assets be considered at book value orrevalued?Is any compensation necessary (if assets aresold)?What is the status of accounts receivable (andbad debts)?
The leaders need to determine what assets willbe needed to adequately serve the members of theunified cooperative. In some cases, all assets will beretained, as when the merger involves complimen-tary cooperatives and there is little duplication ortrade overlap. It may be more complex in othercases (duplication and overlap) and assets of bothcooperatives are of equal quality and capacity andhave similar locations.
will be needed by the unified cooperative, themerging parties must agree on the value of assets.
It is generally advantageous to simply acceptthe balance sheet asset (book) values of the mergingcooperatives. This is the simplest and most com-monly used method in mergers. However, whenusing book values, make sure that asset values (e.g.,inventory, investments, and fixed assets) are report-ed accurately.
Once the decision is made about which assets On the other hand, when joining organizations
F~~II~S I-- Consolidating Balance Sheet Components
Cooperative A
+ Cooperative B
Assets
Assets
(1)(2)(3)
Unified Cooperative Assets(4)(6)(6)
Cooperative A Liabilities
+ Cooperative B Liabilities
Unified Cooperative Liabilities
(1)
(2)(3)(4)
What assets (capacity) will be needed?What are the fixed assets worth?What depreciation, writeoff, or salvage valuation methods areused? Is there any windfall potential?Should assets be considered at book value or revalued?Is any compensation necessary (ii assets are sokl)?What is the status of accounts receivable (and bad debts)?
How do the total debt to total assets ratios compare (are debtlevels equivalent)?Are accounts payable levels similar?Are asset sales to retire debt necessary?Are liabilities similarly structured (i.e., current, long-term)?
Cooperative A Equity
+ Cooperative B Equity
Unified Cooperative Equity
(1) How are equities identified?(2) What are the differences in equity types?(3) What are the respective redemption plans?(4) What are the redemption schedules (if applicable)?(5) Are the cooperatives current in redeeming equity?(6) What alternatives are available/applicable for consolidating
member equities?(7) What redemption plan will best suit the unified cooperative?
Assets = Liabilities + Equity
If tax implications are relevant to the situation, what are they?
3
use considerably different methods for deprecia-tion, debt writeoff, salvage valuation, or have prop-erties of possible windfall potential, proceduresother than the general acceptance of book valuesmay be necessary. Other procedures include evalu-ating assets on a liquidation basis, collateral basis,or appraisal basis.
The evaluation of assets of the cooperativescontemplating merger must reflect member-equityvalues. If book values are used, member-equity val-ues also can be accepted. However, if assets are val-ued by appraisal or some other method, then mem-ber-equity values may have to be adjusted.
Reevaluation of assets and member equitymay negatively impact some member good-will.Therefore, reevaluation must be done fairly and itsimpact well communicated to members.
When compensation for assets of one of themerging cooperatives is necessary (e.g., assets aresold or their value is appreciably high) the form ofcompensation must be negotiated. Compensationcan be in cash, stock, notes, debentures, or bookcredit. Cash payments may be made in a lump sumor over a period of years.
LiabilitiesMerger questions related to the examination of
liabilities include (figure 1):
(1) How do the total debt to total assets ratios com-pare (are debt levels equivalent)?
(2) Are accounts payable levels current and simi-larly structured?
(3) Must assets be sold to retire debt?(4) Are liabilities similarly structured (i.e., current,
long term)?
Real differences in liabilities and long-termdebt obligations can pose problems for mergingcooperatives. However, differences must be ana-lyzed in relative terms. The merger committee oranalysts should start by examining the ratios oftotal debt (total liabilities) to total assets.
Ratio differences may indicate a possiblesource of friction between members of the partici-pating cooperatives. If friction occurs, one methodof alleviating the problem is to dispose of some of
the assets from the cooperative(s) with greater debtto reduce the debt burden.
However, the outcome of such action (the saleof assets) must be carefully examined. First, towhom are the assets being sold. Will competitors bebidding on assets.7 If so, how will such a sale affectthe unified cooperative’s operations? Second, criti-cal assets must not be sold simply to alleviate a dif-ference in debt-the capacity of the assets thatremain after sale must be sufficient to meet the uni-fied organization’s needs.
Therefore, in some cases, debt levels may haveto be transferred as they are (or paid off in someother manner) so that the unified organizationkeeps the physical assets it needs to operate.
There is usually little concern when debt loadsand structures are relatively similar. In most cases,such debt can be consolidated and/or restructuredin a mutually agreeable manner.
Current liabilities should also be examined. Ifthere are major relative differences in current liabil-ity categories-deposits received, advance pay-ments, trade acceptances, notes payable, short-termloans, and current portions of long-term debt-thereasons for such differences must be clarified and acourse of action set for resolving or accepting dif-ferences.
MEMBER EQUITIESMember equity must be carefully examined
during cooperative mergers. Member equity pro-vides the definition and direct measure of mem-bers’ investment and, thus, ownership in theircooperative. Data from 1991 (ACS Research Report124-Equity Redemption and Member EquityAllocation Practices of Agricultural Cooperatives)indicate that equity made up 49 percent of assetsfor those cooperatives with active equity redemp-tion programs (table 1). For those with inactiveequity redemption programs (where equity is sub-ject to but not redeemed) and those whose equity isnot subject to redemption, equity made up 44 per-cent of assets. This ownership in their cooperativemakes members particularly interested in how theirequity is handled (i.e., transferred/exchanged) in amerger.
4
gable I- Equity redemption practices of agriculturalcooperatives, 19911
Percent
Active redemption programs
Total equity to total assets
Unallocated equity to total equity
Inactive redemption programs
Total equity to total assets
Unallocated equity to total equity
49
21
44
15
Systematic programs only 16Special programs only 34
Systematic and special programs 26
Subtotal 76
No equity redemption program 10
Not subject to equity redemption 14
Total 100
t Rathhone and Wissman (ACS Research Report 124).
Figure 1 lists seven questions pertaining. toconsolidating members’ equity:
(1)(2)(3)(4)
(5)
(6)
(7)
How are equities identified?What are the differences in equity types?What are the respective redemption plans?What are the redemption schedules(if applicable)?Are the cooperatives current in redeemingequity?What alternatives are available/applicable forconsolidating member equities?What redemption plan will best suit the unifiedcooperative?
Cooperative leaders negotiating a mergermust determine how to handle differences in equitytypes and what equity instruments should be usedby the unified cooperative. They will also need toexamine alternatives for consolidating equity andredeeming equity, and work out various relatedissues.
Allocated EquityEquity capital in a cooperative is either allocat-
ed or unallocated. Allocated equity is capitalassigned proportionally to each member on thebasis of the patronage or business the member con-ducts with the cooperative.
Allocated equity is acquired in several differ-ent ways: (1) by direct investment from members(common stock, preferred stock), (2) through aretained patronage allocation (i.e., preferred stock,allocated equity), or (3) through per-unit retains.Conversely, unallocated equity is capital retainedby the cooperative that is not assigned or designat-ed to specific member accounts.
Cooperatives involved in mergers may havedifferent allocated equity profiles. In some, equitiesmay be accrued and labeled differently.Redemption plans and schedules may be at differ-ent stages. Others may carry old allocated equity ofinactive, retired, or deceased members. Differencesin the equity profiles of merging cooperatives mayor may not cause problems. Small differences canusually be overcome easily. On the other hand,variations in redemption schedules and/or thepresence of old allocated equity may create conflictbetween the members of merging cooperatives.
Unallocated EquityWhile not assigned to a member’s account,
unallocated equity makes up varying amounts oftotal equity in cooperatives. In 1991, unallocatedequity made up 21 percent of total equity for coop-eratives with active redemption programs. Forthose cooperatives with inactive redemption pro-grams, unallocated equity made up 15 percent oftotal equity (table 1).
Even though not individually assigned, mem-bers have a vested interest in how unallocated equi-ty is handled. This is especially true when onecooperative has a much larger unallocated accountin relation to its allocated equities than the othercooperative(s). It may be prudent to transfer someunallocated equities from the cooperative with therelatively larger amount into associated memberallocated accounts. However, such a procedurerequires careful study and administration.
5
Equity Redemption PlansThere are three types of systematic equity
redemption programs in agricultural cooperatives:revolving fund plan, base capital plan, and percent-of-all-equities plan. There are also special programsactivated by events that occur to individual mem-bers, such as when they die, retire from farming, orreach a prescribed age.
In 1991,76 percent of all cooperatives hadsome type of active equity redemption program, 10percent had no program, and 14 percent were notsubject to equity redemption (table 1). These datasuggest that cooperatives discussing merger arelikely to have either different or no equity redemp-tion programs. Such differences can lead to prob-lems if each cooperative feels its program or policyis superior.
Members of a cooperative current in redeem-ing its equity may be reluctant to merge their equi-ty on an equal basis with a cooperative that is notcurrent. In other words, members of a cooperativein a more current equity position may be reluctantto dilute their equity by assuming the redemptionburden of a cooperative in a less current position.While the concern of members in such a situation isunderstandable, it is important to carefully examinethese differences and reach an agreeable solution.
If one (or more) of the merging cooperatives issignificantly behind in redeeming its equity, a planshould be devised to either reallocate the old equityinto a current equity rotation schedule or pay it off.On the other hand, if merger participants are cur-rent in redeeming member equity and have similarredemption programs, then the major issues toaddress are how to unite the equities and phase-inthe equity redemption program chosen for the uni-fied cooperative.
To alleviate potential problems, leaders of eachcooperative should openly analyze positive andnegative aspects of each plan. The program ulti-mately chosen should be a current-user based plansupported by the members. Of course, the level ofsupport members exhibit will likely be tied to howwell they perceive that their leaders analyzed eachplan and handled respective differences in redemp-tion schedules and/or outstanding equity
Merger participants should develop and imple-
ment an equity structure for the emerging coopera-tive that reflects current patterns of usership andthen adhere to it. Farmers benefitting from the coop-erative today should be those who finance it.
If old allocated equity of inactive, retired, ordeceased members is still on the books of the coop-eratives studying merger, then a strategy should bedeveloped to retire or pay it off.
ALTERNATIVES FOR CONSOLIDATINGEQUITY
There are numerous ways to consolidate equi-ties during cooperative mergers. This section pro-vides information and examples, in a general sense,pertaining to several methods of consolidating themember equity of cooperatives being merged. Otherinformation pertaining to mergers, consolidations,and acquisitions is also included in this section.
Examples-Hatfield, et al. ReportA report by Hatfield, et al. (Consolidation of
Allocated Equity for Merging Cooperatives PreviouslyOperating on a Revolving Fund, 1986), describes sixoptions for consolidating the equity of cooperativesin different stages of redemption: immediate pay-off, delayed payoff, prorate old equity, reassign-ment to unallocated reserves, equity reevaluation,and base capital plan. The options are describedhere and examples provided where applicable.
hmediate PayoH In this option, the survivingcooperative pays all allocated equity older than apredefined date. That date, prescribed by themerging cooperatives, corresponds to the age-inyears-that the oldest allocated equities are to be inthe unified cooperative. For example, if thecooperatives agree to 7 years, all allocated equityolder than that would be considered old equity andimmediately paid. All allocated equity is broughtinto the merger as is. No concern is given to theamount or actual status (age) of the equity.
Delayed Payoff This option is similar to theimmediate payoff. Existing equity levels arebrought into the merged cooperative. Thedifference is that the old allocated equity (as set bythe predefined date) is paid off at some specified
6
rate (e.g., 2 or 3 years at a time), on a delayed basis(e.g., per fiscal year), and not all at once. Thedelayed payments are continued until all the oldallocated equity has been redeemed (up to thepredefined date).
Hatfield, et al. noted the disadvantage of thesetwo options is that they may be inequitable, espe-cially if a significant difference exists in revolve-ment periods and amounts of old allocated equity.Also, the pressure put on cash reserves may weak-en the capital structure of the unified cooperative(although more so in the immediate payoff planthan in the delayed plan). These options shouldonly be considered when leaders are assured thatthe unified cooperative will not be left with insuffi-cient net worth and financial strength once themerger is completed.
The advantage is that they are likely to be well
perceived in a public relations light-especially tothose members whose cooperatives are on equalfooting in equity redemption, and to those mem-bers whose cooperative is behind in equity redemp-tion in relation to its merger partner(s). However,members of a cooperative further along in equityredemption may not agree with the good-will ges-ture.
Prorate Old Equity The old equity of the mergingcooperatives is prorated over a revolvementschedule. If there is a significant difference betweenthe age of each cooperative’s equity, this option willnot be equitable to the parties involved. Thecooperative more current and with less old equitywill be paying part of the old equity of the otherpartners.
Table 2 (example I) shows prorating old equity.
Table 2- Example 1, prorating old allocated equity, Cooperative A and Cooperative B merging
Ahcated equity Revised equity totalAge in Combined 7-year totals Proratedyears’ Coop AZ Coop 93 equity4 equiW Coop A’ Co-opB@ Combined0
_______ _ _________ Tjwusa& &l/am ___ ______________ Percent _____________________ l=hol/eanrj r&&n --------------------
7 50 55 105 7 17 67 55 122
6 125 200 325 21 52 177 200 377
5 100 125 225 14 35 135 125 260
4 75 150 225 14 35 110 150 260
3 55 250 305 19 48 103 250 353
2 110 95 205 13 33 143 95 238
1 80 100 180 12 30 110 100 210
Totals 595 975 1,570 100 250 845 975 1,820
Equity over7 years old 250 0 250 0 0 0 0
SOURCE: Hatfii, et al., p6. (modified example)1 Cooperatfve B is on a 7-year revolving fund plan and current, and Cooperative A does not have a member redemption plan or has neverredeemed allocated equity.2 Allocated equity of Cooperative A-last 7 years and total allocated equity over 7-years old.1 Allocated equity of Cooperative B-last 7 years.4 Allocated equity from Cooperative A and Cooperative B added together for each year, overall, and old equity.5 Combined equity in each year of the 7-year period divided by the total of the 7 years.a The $250 old outstanding equity of Cooperative A multiplied by the corresponding percent data in the preceding column.7 Revised equity of Cooperative A-original allocated equity (2nd column) plus prorated old equity.8 Cooperative B revised equity the same as previously because there was no old equity.e Combined revised equity total of Cooperative A and Cooperative 9.
7
In this example, Cooperative A has allocated equitymore than 7 years old, while Cooperative B isredeeming equity on a 7-year revolvement cycle.The older allocated equity of Cooperative A($250,000) is prorated over the latest 7 years to coin-cide with the redemption schedule of CooperativeB. The equity is prorated by multiplying total allo-cated equity older than year 7 by the percentage incolumn 5 of table 2 (combined equity for each yearas a percent of 7-year combined total) for each yearof the 7-year period.
The resulting amount is then added to theequity of Cooperative A for redemption in the cor-responding year. While example I shows the totalamount of old equity of Cooperative A being pro-rated, actually, the old equity of each member ofCooperative A is being prorated.
This plan brings the older equity of one coop-erative into the shorter revolving cycle of the othercooperative. Spreading the old equity redemptionobligation over a number of years softens the finan-cial burden of trying to redeem significant equityamounts all at once.
Example A-I shown in appendix table 1 is sim-ilar to example I except that both Cooperative Aand Cooperative B have old equity prorated. Thiscase assumes that a 9-year revolving fund is chosen(both cooperatives were revolving on a longerschedule at the time of merger) for the unifiedcooperative. Thus, the old equity of each coopera-tive is prorated over the 9-year schedule.
This option shortens the period of equity rota-tion of one or both cooperatives in example I andexample A-I. However, when cooperatives havesignificantly different equity profiles prior to themerger, such as in example I, the plan is not equi-table to all members.
Reassignment to Unallocated Reserves Thisoption also alleviates the equity redemptiondifferences of Cooperative A and Cooperative B.The less current cooperative-Cooperative A-absorbs an amount of equity (recent equity) equalto its old equity (amount older than the agreed-upon 7 years) and crediting it to unallocatedreserves of the unified cooperative. Cooperative A(as used in the previous example) would deduct
$250,000 from its recent 7-year allocated equity total($595,000; the deduction could be prorated over the7-year rotation schedule) and the unifiedcooperative would be credited with $250,000 inunallocated reserves (table 3-example II).
To account for the loss of recent equity, eachpatron of Cooperative A could be issued a capitalloss statement equal to the amount deducted fromhis/her recent equity portion. However, this exer-cise still results in the need to account for the$250,000 old equity (greater than 7 years). One solu-tion is to bring it into the 7-year-redemption sched-ule. Prorating this amount over the most recent 7years in the same manner as presented in example I(table 2) leaves the unified cooperative with com-bined equity of $1,820,000 as shown in the last col-umn of table 3, including the $250,000 of unallocat-ed reserve.
Hatfield, et al. point out that this option treatsall members fairly and equitably because it placesthe responsibility for older unredeemed equity onthe cooperative with the older equity.
Equify Reevaluation An interesting formula isprovided in this option. The book values of themerging cooperatives’ allocated equity are adjustedaccording to appraised values of that equity. Theseconversion ratio formulas are used to adjust bookvalues in this option:
Conversion ratio formula for Cooperative A:
A, = Aa/AbBa/Bb
Conversion ratio formula for Cooperative B:
B, =Ba/Bb
Aa/Ab
A and B represent Cooperatives A and B whilea = appraised value,b = book value, andr I reevaluation multiplier.
8
Table 4 (example III) uses this approach forreevaluating allocated equity. The example assumesthat Cooperative A’s allocated equity (book valueof $845,000) is appraised at $950,000 andCooperative B’s allocated equity (book value of$975,000) is appraised at $1.3 million. The reevalua-tion multipliers are derived by using the conver-sion ratio formulas-A, = [950,000 + 845,000] + [1,300,000 + 975,000]
= 0.843 andB, = [1,300,000 + 975,000] + [950,000 + 845,000]
=1.186).Thus, Cooperative A’s reevaluation formula is 0.865and Cooperative B’s is 1.186.
Using these multipliers, the allocated equity ofCooperative A adjusts to $712,000 ($845,000 x 0.843)
.and that of Cooperative B adlusts to $1.156 million($975,000 x 1.186). The combined total for the uni-fied cooperative would be $1.868 million. Thisexample indicates total equity figures-in practice,adjustments are made to each member’s individualequity.
Hatfield, et al. report that because each coop-erative’s allocated equity is discounted to reflect itsrelative value (based on an appraisal), members aretreated equitably. Further, this approach allows theunified cooperative to develop any form ofredemption program. The adjusted total equity
gable S- Example II, transferring old outstanding equity to unallocated reserve,Cooperative A and Cooperative B merging
Age inYears
Allocated equity of Cooperative A Intermediate RevissdEquity of Co-op A
OIigilIal Percent of Deduction1 Adjusted Cooperative B combined old equity combined
equity 7-year total balance2 equity3 prorated4 equity6
7 50 8 20 30 55 85 17 102
6 125 21 53 72 200 272 52 324
5 100 17 43 57 125 182 35 217
4 75 13 32 43 150 193 35 228
3 55 9 23 32 250 282 48 330
2 110 19 47 63 95 158 33 191
1 80 13 32 48 100 148 30 178
Totals 595 100 250 345 975 1,320 250 1,570
Old equity 250 0 250
Unallocatedreserve 250 250
Total equity 845
SOURCE: Hatfii. et al.. D. 9 lmociifii example).
975 1,820 1.820
Recent equity ckkction’of skated equity-hhived by multiplying percent (of Cooperative A 7-year total)by equity greater than 7 years-to be credited to unalloceted msetve of new cooperative.Adjusted balance is the original equity of Cooperative A less the deduction.Adjusted balance of equity of Cooperative A plus corresponding-year equity of Cooperative B.Old equity of Cooperative A prorated over most current seven years based on percentage of equityownership (of both cooperatives combined) in most recent 7-year period (see 6th column of table 2).Intermediate combined equity plus prorated equity.
9
TEW c Example iii, adjusting allocated equity basedon conversion ratio formula, Cooperative Aand Cooperative B merging
Coopwaive A Coopmative B Combined totals
Thousand &Uars
Book value 845 975 1,820Appraised value1 950 1,300 2,250
Conversion ratio* 0.843 1.188
Adjusted equity3 712 1,158 1,858
Source: Ha&Id, et al., p.11 (modified example).l Appraised velues assumed for example purposes.* Conversion ratio derived by conversion ratio formula (see text).3 Ac@sted equity is cbrived by multiplyiig equity at book value by
conversion ratio.
could be divided equally to fit into an equityredemption schedule, or it could be converted to abase-capital plan, or a percentage-of-all-equitiesplan.
The basis of this alternative is the appraisalprocess. It must consider each cooperative’s poten-tial for deriving positive returns as well as the con-dition of the fixed assets. A cooperative may showa capital loss in the reevaluation process due to adecline in property values or earning power (asCooperative A did in example III).
Base Capita/ P/an Under this plan, a total equityrequirement is determined for the unified,cooperative. Each member would be obligated tohold equity in the unified cooperative based onhis/her business volume during the year.
Each member’s annual business volumewould be divided by the total business volume ofthe unified cooperative (a 3- or S-year average forinstance) to find a basis. The resulting basis-per-cent (i.e., relative proportion of cooperative use andthus, equity requirement)-for each member wouldbe multiplied by the unified cooperative’s totalequity requirement to derive each member’srequired equity investment.
Then, a comparison between each member’srequired equity investment and current equity
holding in his/her pre-merger cooperative wouldbe made to determine if the member is over- orunder-invested. Equity of over-invested memberswould be retired while under-invested memberswould make up the equity deficiency (some combi-nation of direct cash payment, retained earnings,capital retains, and/or the purchase of equity froman over-invested member). The investment wouldbe adjusted annually according to the individual’spatronage and the cooperative’s capital needs.
This method for consolidating equity may bethe easiest to administer in situations where thereare significant differences in the amounts of mem-ber equity between the pre-merger cooperatives.However, Hatfield, et al. point out that pre-mergerinequities will continue to exist unless there is astock reevaluation. If stock is revalued, inequitiescan be corrected.
Handling inactive Patrons Hatfield, et al. alsopresented a buyout option for paying off the equityof inactive patrons. In contrast to leaving inactivepatron equity in the unified cooperative forredemption in the chosen schedule, inactivepatrons may receive a lump-sum payment for theirallocated equities. After reaching agreement of adiscount rate, the present value of future equitypayments from the revolving fund plan would becalculated and the total paid in lump sum.
This procedure gives the inactive member theoption of immediately receiving cash for his/herequity at a discounted rate rather than having itplaced in the equity revolvement rotation of theunified cooperative for later redemption.
Table 5 (example IV) illustrates this situation.One member of Cooperative A has old equity of$400 that is prorated over the 7-year redemptionperiod. To discount the equity, the prorated amountfor each year is multiplied by the present valuemultiplier for the established discount rate (e.g., 8percent) and for the appropriate time period.(because the equity from year 7 would be redeemedin year 1, the corresponding multiplier would befound by using 8 percent and 1 year.) Followingthis pattern for all 7 years results in a discountedtotal value of $297 for the member. Thus, this mem-ber would have the option of receiving a lump sum
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we s- Example IV, present value of old equity ofone inactive member of Cooperative A
Age inYears
Old equity of PIwent VahJemember’ multipliiF
Dollars Number
PresentVdlW
Dollars
stock of each cooperative into the unified organiza-tion in its current and original form. Under thisscheme, the original policies from each cooperativeprior to merger would continue until the stockcould be retired or voluntarily exchanged foranother type of member equity.
2 7 0 . 9 2 6 2 56 3 0 . 8 5 7 7 1
5 7 0 . 7 9 4 4 65 7 0 . 7 3 5 4 2
7 0 0.681 5 35 2 0 . 6 3 0 3 34 6 0 . 5 8 3 2 7
4 0 0 2 9 7
E x c h a n g e m e r g i n g c o o p e r a t i v e sS t o c k W h e nhave different forms of stock, or stock of differingdividend rates, problems may be avoided bychanging the stock and/or dividend rates of one tomatch that of the other. This option leaves themembers of the unified cooperative with the sametypes of stock.
For example, issue unified cooperative pre-Totals
Old outstandingequity 400 (portion of $250,000 total old equity)
’ Old equity of one member prorated over 7-year redemption periodProrated the same as total old equity of Cooperative A in table 2.
* Present value multipliers from appendii table 2 (&count rate of 6percent).
3 Discounted old equity (prorated equity times multiplier).
payment of $297 in cash or waiting to receive theface value of $400 according to the 7-year equityredemption schedule.
Hatfield, et al. point out that the equity ofinactive members could either be bought by theunified cooperative or sold to an active under-invested member at the discounted value.
Other AlternativesThe options and information provided from
the study by Hatfield, et al. yield some excellentchoices for cooperative leaders to consider for con-solidating equity while examining and negotiatingmergers. Some alternatives and information inaddition to those are provided in this section.
Transfer Stock Most agricultural cooperatives areorganized as stock cooperatives. (See definitions ofstock and nonstock cooperatives in the Appendixglossary.)
If differences in stock types, amounts, or divi-dend rates are not too great between merging coop-eratives, it may be feasible to bring the outstanding
ferred stock (similar to that of one cooperative) tomembers of a cooperative who have only commonstock. Or, exchange stock from one cooperative thathas a lower dividend rate with that from the uni-fied cooperative with a higher dividend rate.
Exchanging stock or equities may involveincorporating a simplified capital structure for theunified cooperative. One method combines alltypes of stock and equities of the participatingcooperatives into one account. Then, distribute oneshare of common stock to each eligible member andconvert the remaining equities to some form ofnonvoting stock (e.g., preferred.stock) or allocatedcapital reserve (e.g., capital certificates) that retainsthe original order of redemption.
Group Old Equity Some mergers involvecooperatives that have allocated equity extendingbeyond the new (agreed upon) equity redemptionrotation period. An alternative for handling thatold equity is to break it down into groups andallocate it t0 selected age-years of the newredemption period.
This alternative uses a prorated approach, butunlike the equity examples used by Hatfield, et al.,the equity is not prorated systematically. Equity isgrouped and allocated into select years of the rota-t’ion schedule via a pragmatic examination of theequity data. No precise formula is used. The oldequity is grouped into the schedule years to createequity redemption similarities among the mergingcooperatives.
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The equities of Cooperative A andCooperative B-used in the previous examplesfrom Hatfield, et al. (table 2, example I)-could begrouped. Table 6 (example V) shows that the$250,000 of old equity of Cooperative A is arbitrari-ly broken into three groups ($65,000, $165,000, and$20,000). These groups are allocated into three age-years (4,3, and 1, respectively) of the 7-year rota-tion schedule. The net result is that the old equityof Cooperative A is grouped and distributed intothe chosen 7-year equity rotation schedule relativeto the distribution of Cooperative B equity in theschedule.
This option allows old equity of CooperativeA to be reallocated into the new 7-year equityredemption rotation period. However, the equity isgrouped and placed into age-years that will resultin the old equity being redeemed in future years.While this goes somewhat against the principle thatcurrent users be current financers, it is more equi-table to the members of Cooperative B. The older
equity of Cooperative A is placed in later revolvingyears.
This equity grouping and allocation could alsobe done in other ways. In essence, the precise typeof distribution followed is irrelevant as long as bothcooperative memberships are satisfied with theresults. However, two rules should be followedwhen using this option to ensure that the equitygrouping and subsequent allocations are logicallymade:
(1) Avoid allocating any equity groupings intothe oldest equities (front years of the schedule)that will be redeemed during the unified coop-erative’s first few years of operation-thisavoids placing an additional financial burdenon the unified cooperative. (In table 6, exam-ple V, no groups are allocated to scheduleyears 7,6, and 5.)
(2) Develop equity group sizes relative toequity amount differences between the merg-
we IZ- Example V, grouping and reallocating old allocated equity, Cooperative Aand Cooperative B merging’
Allocated equity Revised equity totalsAge in Grouped equityyears Coop A C-WB Coop AZ Co+p A Coop B
Thousand dollars
Combined
7 5 0 5 5 5 0
6 125 2 0 0 125
5 100 125 100
4 75 150 6 5 140
3 55 2 5 0 165 2 2 0
2 110 9 5 110
1 60 100 2 0 100
Totals 595 9 7 5 2 5 0 645Equity over 7years old 2 5 0 0 0 0
Grouping of old equity:Group 1 6 5Group 2 165Group 3 2 0
1 Equity data from same cooperatives in table 2.* Pragmatic grouping of old equity of Cooperative A and reallocation among years 4,3, and 1.
5 5 105
2 0 0 3 2 5
125 225
150 290
2 5 0 4 7 0
9 5 205
100 200
9 7 5 1,820
0 0
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ing cooperatives in the various years chosenfor allocation. (In example V the third .$20,000group allocated to age-year-l makes the equityamounts between the members of the twocooperatives even.)
This option would be more complicated ifboth (or more) cooperatives have old allocatedequity that extends beyond the agreed-upon rota-tion period for the unified cooperative. However,grouping and reallocating the old equity could stillbe a valid and equitable option as long as theresulting aged equities of each cooperative are simi-lar and not so large that a substantial financial bur-den is placed on the unified cooperative.
E9ua/ but Weighted Grouping Another optionfor reallocating old equity is to prorate it among theyears of the new schedule on an equal, yetweighted basis. Old equity would be allocatedamong the age-years by multiplying it by a scaledpercentage derived for each year of the rotation.
Table 7, example VI, shows this option. Part ofthe over 7-year equity of $250,000 of Cooperative A
is allocated among each rotation year by multiply-ing it by a scaled prorate percent. To determineappropriate scaled percents, divide 100 percent by 7years. The resulting percent figure is used for themiddle year of the rotation. Then, each precedingand additional year is decreased and increased,respectively, by 1 percent for each consecutive year.
In example VI, 100 percent divided by 7 yearsequals 14.3 percent. This percentaged is given to themiddle year (year 4). Then scale each consecutiveyear higher than year 4 by 1 percent lower than thepreceding year, and each consecutive year lowerthan year 4 is scaled by 1 percent higher than thepreceding year. (Note that the scaled prorate per-cent for age-year 7 is slightly different. An adjust-ment was made to that year to make the percent-ages sum to 100.)
Follow a similar procedure for any number ofodd years in a schedule. For schedules with an evennumber of years, use the resulting percent figure(100 percent divided by the number of years) forthe middle two years and then follow a similar scal-ing procedure (example VI) for the rest of theschedule.
gable 7- Example Vl,.scalad prorating of old allocated equity, Cooperative A and Cooperative B merging’
Allocated equity Scaled Revised equity totalAge in Combined prorate ProratedYears Co-op A Coop B equity Pe-nP equiW Coop A Coop B Combined
_________ ______ Thousand &,/jam _______________ Penxnt __ ______________ ____ Thoum,j &//a,-~ ______ __ __._________
7 50 55 105 11.2 28 78 55 1336 125 200 325 12.3 31 156 200 3565 100 125 225 13.3 33 133 125 2584 75 150 225 14.3 36 111 150 2613 55 250 305 15.3 38 93 250 3432 110 95 205 16.3 41 151 95 2461 80 100 180 17.3 43 123 100 223
Totals 595 975 1,570 100 250 845 975 1,820
Equity over7 years old 250 0 250 0 0 0 0
1 Equity data from Cooperative A and Cooperative B-same as table 2, example A.z Scaled prorate percents derived by dividing 100 percent by 7 years, using that result for the middle year, and then scaling that fiire higher
toward earlier years (and lower toward later years of schedule). In this example, 14.3 percent is the result used for the middle year (4th year).Then each consecutive year higher than year 4 is scaled 1 percent lower than the preceding year, and each consecutive year tower than year 4is scaled 1 percent higher than the preceding year.
3 Prorated equity derived by multiplying $250,000 (old equity) by the scaled prorate percent figures of the preceding column.
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While this option may not be equitable to allmembers (those of Cooperative B), it may be palat-able because of the way it distributes a higher pm-portion of the old equity (such as Cooperative A)toward the later years of the redemption rotationschedule.
Percentage-of-All-Combined Equities Thisoption is analogous to the Percentage-of-All-Equities redemption plan used by manycooperatives.
The cooperative would redeem a percentage ofall outstanding allocated equities. All memberswould receive the same percentage of their equitiesregardless of when they were originally allocated.The percent figure used for redemption would bedetermined by the board of directors, given the uni-fied cooperative’s financial performance and capitalneeds. Members would receive an equity redemp-tion derived from a percentage of their total equityaccounts included in the combined equities of theunified cooperative. Equity would be redeemedannually or as determined by the board.
All combined equity would be redeemed bythe percentage-of-all-combined equities plan beforeany new allocated equity, accumulated from theoperations of the unified cooperative, would beredeemed. Once all past equity is redeemed, the
ia~e e- Example VII, percentage of all combinedequities plan
Cooperative A Cooperative B Combined
Thousand Dollars
EquityAookvalue 845 975 1,820
Equity-adjusted’ 950 1,300 2,250
Equity redeemabld 1 3 5 ( 6 % )
1 Equity adjusted following valuation of assets.2 Equity redeemable after first year of operation--percent of all
combined equity plan, subject to financial performance and equityrequirements. (Each member would receive 6 percant of equitieshe/she has alkcated in combined equity.)
new equity could be similarly redeemed or arevolving fund established.
Table 8, example VII, shows this option usingthe same‘two cooperatives in the previous exam-ples. After appraisal, Cooperative A’s $845,000 ofallocated equity is adjusted to $950,000 andCooperative B’s $975,000 is adjusted to $1.3 millionfor a combined equity total of $2.255 million (eachmember of Cooperative A would have his/herequity adjusted by a multiplier of 1.12($950,000/$845,000). Those in Cooperative B wouldhave their equity adjusted by a multiplier of 1.33($1.3 million/$975,000).
In the first year of operation, the board makes$135,000 available for redemption. This amount,applied against the combined adjusted equity total,is 6 percent. Thus, each member would have 6 per-cent of equity redeemed (equity in the adjustedcombined equity total). This procedure would befollowed each year until all the combined equity isredeemed.
In this example, assets shown were revalued.This illustrates that this option fits well with merg-ers that involve asset reevaluation. Equity is adjust-ed to reflect asset values provided by the reevalua-tion and then combined. This option also applies tosituations where no assets or equity are revalued.
The major factor to consider in using thisoption is its fairness or unfairness to members,given that all their equities will be combined intoone grouping without regard to original dates ofissuance.
The Percentage-of-All-Combined Equity planis easy to administer and understand. It can also befinancially beneficial. Annual redemption of thecombined equities would not be predeterminedbased on historically allocated sums but ratherdetermined on the unified cooperative’s mostrecent financial performance and capital require-ments.
The disadvantage is that if equity is revaluedat higher levels for both cooperatives, such as inexample VII, then the unified cooperative will beresponsible for redeeming higher levels of equitythan originally prescribed.
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AcquisitionsAcquisition characteristics distinguish them
from merger and consolidation transactions. In anacquisition, one cooperative purchases the assets ofanother. The cooperative being acquired is dis-solved and ceases to exist. The acquiring coopera-tive assumes the assets, and sometimes the liabili-ties.
The board of directors of the acquiring cooper-ative must vote whether or not to proceed with thetransaction. A full vote of the members is notrequired. However, members of the cooperativebeing acquired generally must vote on liquida-tion/voluntary dissolution. While a full member-ship vote is not necessary for the acquiring cooper-ative, lack of membership support may inhibitfuture operations of the unified cooperative. Thus,it is in everyone’s interest that directors of theacquiring cooperative proceed with the transactiononly with sound member support. A strong direc-tor-to-member communication program will berequired.
When cooperatives aspire to combine assetsthrough an acquisition, consolidation of critical bal-ance sheet components requires careful negotiationand analysis, just as in a merger or consolidation.Members of both cooperatives have a vested inter-est in how the transaction is completed. Often, theassets of the cooperative being acquired will bereevaluated (e.g., market value).
To speed the process, the acquiring coopera-tive may find it practical to assume the liabilities ofthe other. However, the acquiring cooperative is notrequired to assume the liabilities of the dissolvingcooperative. But, the dissolving cooperative cannotbe folded until it pays its liabilities, so the acquiringcooperative often assumes them. The liabilities canbe assumed as is or be restructured. Restructuringmay be advisable when the cooperative being pur-chased is in poor financial health.
Equity instruments will be issued to the mem-bers of the cooperative being acquired. This is usu-ally done in relation to the value of assets and mayalso be contingent on outstanding liabilities thatmust be assumed and the future earning potentialof the cooperative being acquired.
The acquiring cooperative may issue equity
certificates, stock (preferred, common), bonds,notes, equity credits, nearly any kind of financialinstrument, to the members of the acquired cooper-ative as part of the transaction. The type issued willusually depend on what acquiring cooperative cur-rently uses and the circumstances pertaining to themember equity of the cooperative being acquired(i.e., equity age and type).
Equity is often transferred during an acquisi-tion by issuing new equity credits (e.g., stock, cer-tificates) to the new members in exchange for theequity they hold in their cooperative. The exchangerate may depend on specific factors (e.g., assetsvalue, equity level) associated with the acquisitiontransaction. The simplest case will involve coopera-tives with similar types of equity. A simpleexchange can be made. However, in some cases anacquiring cooperative may wish to issue differenttypes of equity instruments to different members ina way that makes the equity capitalization plan ofthe acquiring cooperative more fair to members.For example:
Issue stock and debenture bonds. Cooperative A isacquiring Cooperative B. Cooperative A has a 7-year equity redemption schedule while its partnerhas not redeemed equity in many years.Cooperative A issues one share of common (voting)stock and preferred stock (its primary memberequity instrument) to Cooperative B’s current-usermembers in exchange for their accrued equity.Cooperative A then issues debenture bonds (withgiven due dates) to the inactive members ofCooperative B in exchange for their accrued equity.
This allows the current-user members ofCooperative B to participate in Cooperative A’sequity capitalization and redemption program andprovides a way to retire the old equity ofCooperative B’s inactive members. Their equity willbe redeemed in the form of debenture bonds thatbecome due in the future. Most cooperatives allowmembers to cash in debenture bonds before theyare due.
Acquisitions are disruptive, particularly to themembers of the dissolving cooperative who mayfeel a severe sense of loss. For this reason, it isimportant that the interests of all members effected
15
be respected and protected by the individualboards as the transaction is completed.
SummaryThe six alternatives described earlier as devel-
oped by Hatfield, et al., provide sound examples ofconsolidating the equity of merging cooperatives.
The first four options should be includedamong equity combination considerations of coop-eratives with revolving fund plans (or cooperativesthat have no set redemption plan but are willing toimplement a revolving fund plan). The last twooptions should be included among equity combina-tion considerations of cooperatives with base capi-tal, percentage of all equities, or other special plans.Of course, the last two options also could be usedby cooperatives with revolving funds.
Five additional alternatives are described inthe second part of this section. The first two alter-natives involve the simple transfer and exchange ofstock. The third and fourth should be considered bycooperatives with revolving fund plans or whosemerger plan involves implementing a revolvingfund. The fifth alternative would fit any merger sit-uation. The example corresponding to this alterna-tive indicates that equity is adjusted to reflect assetreevaluation. The other four alternatives could bemade more equitable to members of merging coop-eratives by adjusting members’ equity in accor-dance with an asset reevaluation.
Acquisition, another way to combine coopera-tives, is a popular alternative to merger and consol-idation. The authority granted to the acquiringcooperative via the acquisition makes difficultasset-utilization, financial, personnel, and otheroperational decisions a little easier to carry out.
COOPERATIVE EXAMPLES OF COMBININGEQUITY
Up to this point, general information andexamples of consolidating member equity amongmerging cooperatives have been presented, somefrom previous studies and some developed. Whilethey demonstrate different methods, they don’tindicate precisely how cooperatives complete mem-ber equity transfers/exchanges during actual merg-ers.
This section provides some examples and casestudies of actual cooperative mergers, consolida-tions, and acquisitions. Ten cases are described.Four originate from a report by Haskell (FCSResearch Report 8-Results and Methods of FourMergers By Local Farm Supply Co-ops) completedin 1970. The others stem from a survey of recentlymerged cooperatives.
In the first four case examples, two farm sup-ply cooperatives participated in each merger. Theyare identified as Cooperative A or Cooperative B.
Merger-Different Size and StrengthA relatively larger and stronger Cooperative A
merged with Cooperative B. After the merger,Cooperative A assumed operation of all facilitiesand services previously operated by Cooperative B.Cooperative A became the unified cooperative andassumed all assets, debts, and other liabilities ofCooperative B.
The shares of common stock, share credits,deferred patronage refunds, and patrons’ equityreserves held by members of Cooperative B wereconverted, at par value, into shares and partialshares of common stock of Cooperative A (the uni-fied cooperative). Preferred stock was carried intothe unified cooperative at par value.
Cooperative B was 9 years behind CooperativeA in stock redemption prior to the merger, so twoalternative redemption methods were described inthe merger plan.
Alternative 2. The board of directors of the unifiedcooperative could call stock for redemption orretirement in the order of issuance by years. Theoldest outstanding stock would be called first.Whenever common stock of Cooperative A issuedprior to the effective date of merger would becalled for redemption or retirement, the board ofdirectors would also call a proportionate share ofstock issued to common stockholders ofCooperative B, in the order of issuance by years.Further, no common stock of the unified coopera-tive issued after the effective date of the mergerwould be retired until all common stock issued byCooperative B prior to the effective date had beenretired.
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Alternative 2. The board of directors of the unifiedcooperative could retire common stock after thedate of merger on the basis of a percentage of allthe common stock outstanding. In this event, thesame percentage of the stock of each commonshareholder would be called at the same time,regardless of issue date.
Consolidation-Different Size and StrengthIn this case, a smaller but more financially
sound Cooperative A was consolidated with aslightly weaker Cooperative B. The existence ofCooperatives A and B ended and a new cooperativeemerged. The unified (surviving) cooperativeassumed ownership and operation of all facilitiesand services of the original cooperatives.
The plan of consolidation contained specificarrangements concerning the conversion of stockand stock credits of the original cooperatives tostock and allocated reserves of the unified coopera-tive.
Cooperative A had preferred stock, first issue(6 percent cumulative dividend), preferred stock,second issue (5 percent cumulative dividend), andpatronage common stock and credits (no divi-dends). Cooperative B had preferred stock (5 per-cent noncumulative dividend) and patronage com-mon stock and credits (no dividends).
An owner of stock and/or stock credits ineither original cooperative could determine thesecurities (i.e., of those offered) of the unified asso-ciation that he/she would receive for presentlyheld stock. All exchanges were completed on a dol-lar-fordollar basis as to stated or par amounts.
The consolidated cooperative offered pre-ferred stock (5 percent noncumulative dividend)and 6 percent debenture bonds due in 15 years.Bonds could be exchanged within 3 months fromthe effective time of merger for preferred stock at 5percent noncumulative dividend.
Acquisition l-Different Size and StrengthA stronger and slightly larger Cooperative A
acquired Cooperative B, a smaller cooperativeexperiencing management and financial difficulties.
Cooperative A purchased all of CooperativeB’s plant facilities and equipment, supplies, furni-
ture, fixtures, office equipment, accounts receivable,contracts, leases, and interests in all real and per-sonal property, all at book values.
Cooperative B agreed to exert all possibleeffort to assure transfer of at least 75 percent of itsoutstanding preferred stock held by its members tothe surviving association at par value. Preferredstockholders of Cooperative B would receive nodividends that had been passed. At its option,Cooperative A could void the transaction if 75 per-cent of the stock had not transferred.
Acquisition 24imilar Size and StrengthIn this case Cooperative A acquired
Cooperative B. Both were about the same size andstrength but there was a sharp contrast in the typesof businesses and services they offered.Cooperative A (surviving) assumed operation of allfacilities and services of Cooperative B.
The shares of common stock of Cooperative Bwere converted into shares of common stock of theunified cooperative at par value. The unified coop-erative ended up with common stock at $5 a shareentitling each holder to one vote, and nonvotingcommon stock with a par value of $5 a share.Dividends on both types were eligible for declara-tion by the board of directors out of any net savingsnot distributable as patronage refunds.
Preferred stockholders of Cooperative B wereapportioned one or more subordinated promissorynotes bearing interest at 4 percent a year, andmaturing in 20 years from issue date. Promissorynotes were in the principal amount of the par valueof the preferred stock so exchanged. No dividendswere to be paid on the outstanding preferred stockof Cooperative B for any year beginning on or afterthe effective date of consolidation, whether or notthe stock had been surrendered in exchange for apromissory note.
The oldest outstanding common stock ofCooperative B was issued 18 years prior to mergerand 21 years in Cooperative A. To deal with stock-holders of both cooperatives equitably, the unifiedcooperative retired all of the common stock issued18 years prior to merger. Next came stock issued 20years prior to merger followed by 17 years, 19years, and 21 years. Thereafter, stock issued 16
17
years prior and in any subsequent years was retiredin the order of issuance. This stock redemptionsequence is clarified as follows:(1) Stock issued 18 years prior-Cooperative B’s
oldest stock and Cooperative A’s 18th yearstock.
(2) Stock issued 20 years prior-Cooperative Astock.
(3) Stock issued 17 years prior--stock from bothcooperatives.
(4) Stock issued 19 years prior-Cooperative Astock.
(5) Stock issued 21 years prior--Cooperative A’soldest stock.
(6) Stock issued 16 years prior-stock from bothcooperatives.
(7) Stock issued 15 years prior, followedby 14,13, etc.
The stock redemption gap between membersof each cooperative would be equal following theredemption of stock reflected in the 5th sequence(stock issued 21 years prior).
Recent Case Study ExamplesThis section includes six case studies of farmer
cooperatives that have merged in recent years. Twocooperatives were involved in each merger. Theywere asked several questions pertaining to thefinancial aspects of the merger (see Appendix B).
In all but one case, a committee was appointedto study and negotiate various aspects of the merg-er. The average committee size was nine.Participants consisted largely of directors and man-agement personnel from both cooperativesinvolved. A couple committees also had attorneysand other outside individuals. In one case, accoun-tants were used. One case study subject indicatedthat the committee performed very well, two indi-cated that it performed well, and the others said itperformed okay.
The first case study is described in detail whilethe others are summarized.
Case Study &Cooperatives 0 and P TWO
relatively small cooperatives were consolidated andadopted a new name. A 1Zmember committeenegotiated merger issues. Member support was
moderate. (The cooperatives identified membersupport as strong, moderate, weak, or none.)
The unified cooperative had assets of about$3.8 million. Pie-merger data showed:
Cooperative 0
Sales of about$3.3 million.
Assets of about$2.2 million.
Low debt; short-termdebt-to-asset ratio of14 percent; limitedlong-term debt.
Membership commonstock, certificates ofindebtedness.
No set redemptionprogram; redeemedequity at boarddiscretion.
Cooperative P
Sales of about$2.2 million.
Assets of about$1.6 million.
Low debt; short-termdebt-to-asset ratio ofabout 17 percent;no-long-term debt.
Common stock, pre-ferred stock, pre-ferred stock A.
No set redemptonprogram; redeemedequity at boarddiscretion
Excess equipment assets were sold at bookvalue and the proceeds used to pay off some exist-ing debt. Common stock from both cooperativeswas exchanged for unified cooperative commonstock (par value $10) to members of the participat-ing cooperatives (0 and P). The conversion had tobe made within 30 days after the consolidation.Members who neither wished to join nor converttheir common stock could surrender that stock forcash payment. Stock surrenders also had to bemade within 30 days.
The cooperatives developed and followed aplan for transferring equities. Records were exam-ined to determine equity amounts. The board ofdirectors of the unified cooperative (within 60 daysof consolidation) determined the allocated and totalequities of each constituent cooperative.
For Cooperative 0, the amounts of allocatedpatronage equities consisting of qualified, nonqual-ified, and certificates of indebtedness were deter-mined as well as the total amount of Cooperative 0
equities less the face value of outstanding member-ships (the difference being total Cooperative 0equities).
For Cooperative P, the amount of preferredstock A and preferred stock was determined as wellas the total patrons’ equities less membership orcapital stock (the difference being total CooperativeP equities).
After stock determination, the board of direc-tors allocated to Cooperative 0 equity holders aportion of the total equities of Cooperative 0 notalready allocated. Total Cooperative 0 equitydivided by allocated Cooperative 0 equity had toequal total Cooperative P equity divided byCooperative P stock. This ratio was calculated:
Total Cooperative 0 equity Total Cooperative P equity
Allocated Cooperative 0 equity = Allocated Cooperative P stock
Thus, equal proportions of allocated equitiesof Cooperative 0 and Cooperative P to total equi-ties of Cooperative 0 and Cooperative P werebrought into the consolidation. BecauseCooperative O’s ratio was larger than CooperativeP’s, some of Cooperative O’s unallocated equitywas allocated to its members to make the ratiossimilar.
Table 9 shows this procedure. In the example,
the allocated equity to total equity ratios are notequal. Cooperative O’s ratio is 1.25 whileCooperative P’s is 1.22. To make the ratios equal,$27,400 of Cooperative 0 unallocated equity istransferred to Cooperative 0 allocated equity. Theequities were allocated to members’ allocated equi-ty accounts on a basis similar to that of the mem-bers’ original equity allocations made over the 5-year period immediately preceding the effectiveconsolidation date.
The equities of Cooperative 0 membersbrought into the merger were then converted topreferred stock of the unified cooperative. Eachdollar of equity was converted to one share of pre-ferred stock (par value $1).
Each share of preferred stock (par value $1)held by the members of Cooperative P was convert-ed to a similar share with the unified cooperative.The same procedure was followed for preferredstock A of Cooperative P.
Remaining unallocated equities of Cooperative0 and Cooperative P became a part of the unifiedcooperative’s unallocated reserve to be unallocated,permanent capital.
After consolidation, the equity capital struc-ture of the unified cooperative consisted of capitalstock-shares of common stock (par value of $10)designating membership and voting rights, andpreferred stock A and preferred stock-two classes
T&I~ 4- Case study I, member equity transfer of Cooperative 0 and Cooperative PI
Prior to merger At mergeP
co-op 0 coop P ~OpO co-op P Unifii Co-op
DOliflrS
Allocated equity3 1.055,oOO 787,200 1,082,400 787,200 1,869,OOO
Unallocated equity 265 ,000 172,800 237 ,600 172,800 410 ,400
Total equity 1,320,OOO 960,000 1,320,000 960 ,000 2,280,OOO
Ratio 41.25 1.22 1.22 1.22 1.22
1 Numbers are hypothetical, for example purposes. Assumptions: total equity to total assets = 60 percent and for Cooperative P unallocatedequity to total equity = 18 percent and unallocated equity to total assets = 11 percent.
z To make ratios equal, unallocated Cooperative 0 equity was shifted to Cooperative 0 members allocated equity accounts (in the amountof $27,400).
3 Allocated equity made up of common stock, preferred stock, and certificates of indebtedness.4 Ratio derived by dividing total equity by allocated equity.
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of stock that hold neither voting power nor rightsto participate in management of the cooperative.
The board of directors of the unified coopera-tive was authorized to establish book credits, capi-tal funds, and other allocated reserves to providefunds for corporate purposes as provided in theunified cooperative’s bylaws (i.e., by retains frommargins or proceeds otherwise payable to the mem-bers or by other methods of collection).
The unified cooperative’s program for retiringequities is to redeem patrons’ equities of Cooperative0 and Cooperative P in the chronological order inwhich they were issued. The unified cooperative’sboard of directors was authorized to use discretion incarrying out the equity retirement plan.
Case Study II-Cooperatives Q and R Themerging two cooperatives were of significantlydifferent size. The larger one’s name was retainedafter the merger. A g-person committee negotiatedmerger issues. The merger had moderate membersupport.
The unified cooperative emerged with assetsof about $4.5 million. Pre-merger data showed:
Cooperative Q
Sales near $15 million.
Assets of about$4 million.
Carried no debt.
Common stock andcredit accounts.
Redemption plan:pay 30 percent currentqualified allocatedrefunds in cash;lo-year revolvingschedule; redeemloo percent ofremainingequitywhen member reaches70 years of age.
Coopem tive R
Sales near $1.5million.
Assets of about$0.5 million.
Debt-to-equityratio around 40 per-cent.
Common stock andcredit accounts.
No set redemptionprogram; no setrevolving schedule;had not redeemedany equity for severalyears preceding themerger.
During negotiations, both boards agreed towrite down the assets and equity of Cooperative Rby about 25 percent. Cooperative R was relativelyweaker than Cooperative Q. Cooperative R’s equitywas brought into the merger at the written-downvalue while Cooperative Q’s equity was set at bookvalue.
The unified cooperative paid off CooperativeR’s debt. Common stock of Cooperative Q was con-verted to common stock of the unified cooperative.
because Cooperative R was considerably fur-ther behind Cooperative Q in equity revolvement,the merger committee decided to lump all memberequity credit accounts of Cooperative R into oneequity account. These equities were designated forpayment 2 years after the effective merger date.
The original allocation dates corresponding tothe equities were ignored and the equity in thislumped account was made available for redemp-tion under the unified cooperative’s policy, Equityfrom each cooperative was placed into the allocatedequity pool of the unified cooperative for laterrevolvement at its new designated allocation date.
Table 10 provides a hypothetical example ofthe equity transfer. Cooperative R’s equity is writ-ten down by 25 percent at merger time and broughtinto the unified cooperative. The Cooperative Rallocated equity of $184,500 is lumped into theequity redemption schedule of the unified coopera-tive and designated for payment 2 years after themerger, regardless of original allocation dates.
The unified cooperative adopted the redemp-tion policy of Cooperative Q (i.e., revolve equity ona lO-year cycle).
Case Study Ill-Cooperatives S and T In thisexample, two similar-sized cooperatives weremerged. A committee of 11 negotiated mergerissues. Merger support was strong from themembers of Cooperative S (more than 80 percentfavored) and moderate in Cooperative T (about 70percent favored it).
At the end of its first fiscal year, the unifiedcooperative’s sales topped $20 million. It had assetsof about $13 million. Pre-merger data showed:
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Cooperative S Cooperative T
Sales of nearly$5 million.
Sales topped$10 million.
Assets of about Assets of about$5 million. $7 million.
Relatively highshort-term debt;short-term debt-to-asset ratio justunder 50 percent.
Relatively high short-term debt; short-termdebt-to-asset ratioover 50 percent.
Common and pre-ferred stock (classesA and B).
Common and preferr-ed stock (classes Aand B).
Allocated memberequity redeemed whenthe board determinedthat there was asufficient balance ofworking capital.
Allocated memberequity redeemedwhen the boarddetermined there wassufficient balance ofworking capital.
12 years behind inrevolving memberallocated equity;no.set revolvingperiod.
7 years behind inrevolving memberallocated equity; noset revolving period
To keep this merger on equal terms, all assets,liabilities, and member equities were consolidated
using book values. However, some of each coopera-tive’s assets were sold to eliminate duplication.Proceeds were used to increase working capital.Some short-term debt from each cooperative wasrestructured and converted to long-term debt.’
A favorable majority vote of stockholders ofeach class of stock had to approve consolidation.Cooperative S redeemed all its class A preferredstock (about $10,000 worth) controlled by onlyseven members prior to the merger vote. (The coop-erative was worried that the Class A stockholderswould not approve the merger.) Cooperative Twanted to follow suit for its class A preferred stockbut lacked the capital to redeem it all valued at$60,000.
The possibility of ending up with highamounts of stock of dissenting members after themerger also concerned the committee. So, the coop-eratives limited the amount of this stock theywould pay to $12,000. After the merger wasapproved by a two-thirds majority in each coopera-tive’s stock classes, the amount of stock of dissent-ing members was about $19,000. Even though thisexceeded the $12,000 cap, the cooperatives paidthat stock.
The allocated equity (common and preferredstock) from both cooperatives was transferred tothe unified cooperative on a book-value basis.
The equity redemption program of the pre-merged cooperatives was adopted by the unified
~abis IO- Case study II, member equity transfer of Cooperative Q and COOperatiVe R1
Prior to merger At merge6
Coop 0 Co-op R Coop 0 Coop R’
Dollan
Unifii Coop
Allocated equtip 1,968,OOO 246,000 1,968,OOO 184,500 2,152,500
Unallocated equity 432 ,000 54,000 432 ,000 40 ,500 472 ,500
Total equity 2,400,OOO 300 ,000 2,400,OOO 225 ,000 2,625,OOO
1 Numbers are hypothetical, for example purposes. Assumptions: total equity to total assets = 80 percent, unallocated equity to total equity - 18percent, and unallocated equity to total assets I 11 percent.
2 Cooperative R equity written down by 25 percent.3 Allocated equity of $184,500 of Cooperative R was assigned a new date to be fit into the equity redemption schedule of unified cooperative
(taken from Cooperative Q-date designated as 2 years later than effective date of merger.4 Allocated equity made up of common stock and credit accounts.
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cooperative. Member-allocated equity would beredeemed at the discretion of the board of directorsif working capital was sufficient. Even thoughCooperative S had older allocated equity, no specialpreference was established for its redemption.
Case Study IV-Cooperatives U and V The twomerging cooperatives (U and V) complementedeach other--one being largely in marketing and theother principally farm supplies. They shared morethan 100 members. A committee of eight negotiatedmerger issues. Member support was strong. Theunified cooperative had assets of about $6 million.Pre-merger-data showed:
Cooperative U
Sales near $20 million.
Assets of about $5million.
Relatively lowshort-term debt.
Total debt-to-equityratio under 40 percent.
Common stock andallocated equitycertificates.
No set equityevolvement schedule;board discretionfor redeemingallocated equity;2-year revolvementschedule; pays offequity when memberreaches 70 years ofage.
Cooperu tive V
Sales near $2 million.
Assets of about $1million.
Relatively lowshort-term debt.
Total debt-toequityratio about 40 per-cent.
Common stock, preferred stock, andallocated equitycertificates.
No set equity IF+volvement schedule;board discretionfor redeemingallocated equity,4 year revolvementschedule; pays offequity when memberreaches 77 years ofage.
Assets, liabilities, and equity from both coop-eratives were consolidated using book values. Noassets were sold. Cooperative U’s common (voting)stock had a par value of $20 while Cooperative V’swas $10. Because of this difference, each member ofCooperative V was required to pay $10 to accountfor the share differential. The other allocated equi-ties were transferred on a dollar-for-dollar basis.
Case Study V-Cooperatives Wand X Thesemerging cooperatives had slightly different sales,but about the same value of assets. A seven-member committee negotiated merger issues.Member support for the merger was strong.
Assets of the merged cooperative were about$5 million. Pre-merger data showed:
Cooperative W
Sales of about$5 million.
Assets of about$2.5 million.
Short-termdebt-to-assetratio of 36 percent;no long-term debt.
Total debt-to-equityratio of 55 percent.
Common stock andpreferred stock.
Allocated equityredeemed at boarddiscretion and whenmember reached certainage; no set revolvingschedule.
Coopem tive X
Sales of about$4 million.
Assets of about$2.5 million.
Short-term debt-to-asset ratio of 35 per-cent; no long-termdebt.
Total debt-toequityratio of 55 percent.
Common stock andpreferred stock.
Allocated equity re-deemed at boarddiscretion and whenmember reached certainage; no set revolvingschedule.
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Assets were combined at book values. Noassets were sold. All common stock, preferredstock, per unit retains, and revolving fund creditswere combined into one member equity creditaccount.
One cooperative carried forward a loss frompast years. To compensate, the equity creditaccount of that cooperative was reduced by the lossamount (the equity of each member was reducedproportionately). After this was completed, allmember equity was consolidated.
Every member’s equity requirement in theunified cooperative was set at $1,000 (10 shares ofcommon stock with a par value of $lOO/share).This is like a modified base capital plan. At mergertime, if a member has more than $1,000 equity inhis/her account, the excess is placed into a deferredequity account and not immediately redeemed.Conversely, a member with less than $1,000 in equi-ty is required to make up the difference. However,if the member has more than $100 of equity, the dif-ference is to be made up through equity allocationsover time. The member with less than $100 equitymust pay cash to bring the account up to $100.Subsequent allocations over time would make upthe $900 difference.
Equity Redemption PlanEquity in deferred accounts becomes available
for redemption only when members turn 65 yearsof age. (This is a modified version of a base capitalplan.) Portions of the deferred equity of membersat age 65 or older are redeemed annually on a per-centage basis at the discretion of the board giventhe cooperative’s financial performance.
Case Study VI-Cooperatives Y and Z Thismerger included two large similar-sizedcooperatives. The name of one of the cooperativeswas retained for the new organization. No specialmerger committee was formed. Member supportwas strong.
Sales of the merged cooperative exceeded $2billion. Assets topped $430 million. Pre-merger datashowed:
Gwpem tive Y
Sales of about$1.1 billion.
Assets of about$240 million.
Short-term debt-to-asset ratio of about 43percent; long-termdebt-to-asset ratio of13 percent.
Common stock,preferred stock, andallocated equities.
Revolving plan;no set schedule.
Coopem tive Z
Sales of about$1 billion.
Assets of about$200 million.
Short-term debt-to-assetratio of 34 percent;long-term debt-to-assetratio of 24 percent.
Common stock,preferred stock, andallocated equities.
Revolving plan;no set schedule.
Assets were combined at book values. Noassets were sold. All allocated equities (commonstock, preferred stock, and allocated equities) weretransferred at face (book) value. Unallocatedreserves were identified as pre-merger reserves. Assuch, they are distributable to owners of mergingcompanies in liquidation. During the merger, cer-tain items under warranty (due diligence) werecharged to these pre-merger reserves. After thesecharges were assessed, the remaining equity wascombined.
Difficult financial issues related to the mergerincluded (1) significantly different amounts of unal-located reserves held by the cooperatives, (2) con-tingent liabilities held by each cooperative, and (3)non-member equities issued and outstanding byone of the cooperatives. The first two issues wereresolved through the use (applicable transfer) of theestablished pre-merger reserves. To resolve thethird issue, the non-member allocated equities wereaccepted as is by the other merging cooperative.
SummaryFour cases were discussed from the Haskell
report-a merger, a consolidation, and two acquisi-tions. All involved a stock/equity conversion or
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exchange. Two cases, however, included specialprovisions for redeeming equity.
The merger case involved setting up an equityredemption plan to retire members’ old outstand-ing stock brought to the merger. The plan redeemeda percentage of old outstanding stock provided byboard authorization. This plan is similar to the per-centage-of-all-combined-equities plan describedearlier.
The second acquisition case (acquisition 2)involved cooperatives with a 3-year age differencebetween their old outstanding stock. To correct theredemption gap, an equity redemption revolvingplan was devised that included redeeming equityon a past allocation-year alternating schedule. Thiscreative approach was designed to alleviate theredemption gap after completion of five sequencesof the schedule.
.Six case studies of cooperatives that hadrecently merged were described. Some assets weresold in two of the cases (case studies I and III). Debtwas paid off in one case (case study II) and someshort-term debt was converted to long-term debt inanother case (case study III).
In four of the six case studies, allocated equitywas converted or transferred on a strict book-valuebasis. In the other two cases, allocated equity wasconverted or transferred after adjusting book val-ues. Case study II involved the writedown of assetsand equity of one cooperative because of financialdifficulties. Case study V involved an equity write-down of one cooperative by the amount of its loss-carry forward.
In all six cases, equity was revolved at the dis-cretion of the board. In case study II, one coopera-tive had not redeemed any equity for some time,but the unified cooperative adopted the IO-yearrevolvement cycle of the other cooperative.
Some cases had special clauses attached toequity redemption. For instance, the unified coop-erative of case study V redeems equity only whenworking capital is at “sufficient levels” as deter-mined the board. This cooperative stipulates thatits members first must have $l,ooO of base capitalaccumulated. Then, any allocated equity above the$1,000 is redeemable on a revolving cycle after themember has reached a certain age.
OTHER FINANCIAL ISSUES
Evaluating EquityThe interpretation that equity being brought to
a merger is debt can lead to problems, especially ifone cooperative has more old allocated equity thanthe other merger participant(s). Members of thecooperative(s) with more current equity may beconcerned with the additional debt being assumedby the unified cooperative.
The status of old allocated equity must beresolved during negotiations. Old equity may bepaid immediately, paid by some future installmentsystem, or rolled into a redemption plan of the newcooperative. Old equity paid immediately can beconstrued as a debt obligation at its face value. Onthe other hand, if paid in future installments orrolled into the redemption rotation, then the valueof the obligation is relative to when it will beredeemed.
Equity to be redeemed at some future timeshould not be interpreted as face-value debt.Rather, the interpretation should be tied to the pre-sent value relative to when it may be redeemed.
Table 11 (example VIII) illustrates present val-ues of the equity of Cooperative A and CooperativeB (revised equity values from example I of table 2)calculated at a discount rate of 8 percent. Thisanalysis indicates that the present value of the$847,000 equity of Cooperative A is $626,000 andthe present value of the $975,000 equity ofCooperative B is $719,000 (present value figures are26 percent less than the face value).
Thus, while allocated equity is essentially adebt obligation, its value is directly tied to when itwill be redeemed and the discount rate applied.That is how cooperative leaders examining mergerneed to explain equity to counter negative publicitygenerated by concerned members and/or thoseopposing the merger.
Tax ConsiderationsWhen examining a potential merger, pay spe-
cial attention to the tax considerations relating tothe resulting change in cooperative capital struc-ture. This section provides a cursory view of somerestrictions and implications regarding taxes that
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Table II- Example VIII, present value of allocated equity of Cooperative A and Cooperative B relative to time itwould be redeemed’
Cooper&e A Cooperative BAge in YearYears Redeem& Face vafue Present value Face value Present valueS
_________~_~~~~_~~~~~~~~~~_~~~~~~~~~~~~~~~~~~~~~~ ti,,sa,,d D&rs _________________________________________________
7 1 67 62 55 516 2 177 152 200 1715 3 135 107 125 994 4 110 81 150 1103 5 103 70 250 1702 6 143 90 95 601 7 110 64 100 58
Totals 645 626 975 719
Percent change -26% -26%
1 Equity data (face values) from revised equity totals of table 2.2 Assumes 7-year rotation and that equity 7 years of age will be redeemed after first year and so on.3 Present values calculated with multipliers from appendix table 2 (discount rate of 8 percent used).
cooperatives involved in merger talks should con-sider. It is not meant to be all-inclusive, but merelytouches on some cooperative merger tax issues.
Merger or consolidation can create majorchanges in an organization, disappearance of one ormore cooperatives, and creation of a new or greatlychanged survivor. Capital structure changes thatoccur because of merger or consolidation are con-sidered corporate reorganization (as defined inAppendix A).
Although cooperatives are taxed underSubchapter T as to patronage distributions, they aresubject to the same rules regarding corporate reor-ganizations as other organizations taxed as corpo-rations under the Internal Revenue Code.
Reorganizations refer to transactions thatinvolve the cooperative’s capital structure itself andgo beyond generating and redeeming capitalinstruments as an ongoing capitalization process.These transactions may be subject to speciallydefined tax treatment. The object of most corporatereorganization tax rules is to establish conditionsunder which transactions are not taxable like underother circumstances.
Corporate reorganization tax rules do notspecifically address any of the unique financingcharacteristics of a cooperative. However, coopera-tive reorganizations may be closely analogous tononcooperative corporate reorganizations. Animportant challenge in cooperative reorganizationsis to identify those situations in which corporate taxprinciples will apply to cooperatives and, if so,how.
The Internal Revenue Code treats certaintransactions in corporate reorganizations as taxfree. Much of corporate reorganization tax analysisdeals with whether a transaction is in fact tax free,in whole or in part, and how to meet all qualifica-tions to make it tax free if desired.
A tax-free transaction has two major implica-tions. First, no taxable income is recognized whenstock or assets are sold or exchanged under circum-stances in which a taxable gain would be recog-nized absent corporate reorganization rules.Second, the basis of property in the recipient’shands is a carryover or substituted basis. The taximplications to the new property holder will beincurred upon future sale or exchange. For coopera-
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tives, certain allocated equities may retain their sta-tus in a tax-free reorganization.
Sections 368(a)(l)(A) through (P) of theInternal Revenue Code define six types of reorgani-zations that are essentially tax free, if all of the vari-ous statutory requirements are satisfied.Cooperative mergers or consolidations may fitunder any one of these six reorganizations.
However, cooperative mergers and consolida-tions are often type “A” reorganizations-statutorymergers or consolidations. They often fit this typeof reorganization because the unique capital struc-tures of cooperatives simply do not usually lendthemselves to other types of reorganizations.*
Further, they are called “statutory” mergersand consolidations because the merger or consoli-dation is effected under State incorporation statutesand meet all those requirements.
Statutory provisions that affect merging orconsolidating cooperatives will vary. Most Stateincorporation statutes covering cooperatives con-tain no provisions for merger or consolidation. Insuch cases, cooperatives should use the businesscorporation laws on merger to the extent possible.However, some State statutes contain a reference tocooperative merger among other cooperatives orwith noncooperative business organizations. Thestatutes describe merger procedures in varyingdetail. A typical procedure described includedapproval by boards of directors of all mergingcooperatives, adoption of a resolution and a writtenplan of merger, submission to cooperative member-ship for approval, and formal filing with a Stateoffice.3
Most merger provisions also specify the con-tents of the plan. Common requirements includeold and new names, terms and conditions of theproposed merger, proposed effects on all members
2 See Clark and Erickson (Taxation of Cooperatives) formore information pertaining to cooperative reorganiza-tions.
3 See Baarda (ACS Information Report 30-StateIncorporation Statutes for Farmer Cooperatives) for moreinformation on State statutes that apply to farmer coopera-tives.
or stockholders of each association, and the articlesof the new association.
Provisions typically describe the effects of themerger. The effects are important to implementresults compatible with the tax-free nature of astatutory merger.
To be wholly or partially tax free, a reorganiza-tion must follow a plan. It may not include a subse-quent exchange of one kind of equity for anotherbrought over from a predecessor cooperative if thatexchange was not part of the specified reorganiza-tion plan.
In most reorganizations, several other overallrequirements must be met. For example, courtshave required a continuity of interest for stockhold-ers (member/owners) between the old and the newcorporations. This means they have retained a sub-stantial interest in the enterprise. The businessenterprise itself must show continuity. That is, themerged, consolidated, or acquiring cooperativemust continue the “business enterprise” of the pre-decessors. Such continuity will exist if the successorcooperative either carries on the “historic business”or uses a significant portion of the predecessor“historic business assets” in conducting.the newbusiness.
If reorganization does not have a business pur-pose, it will be denied tax-free treatment. Thisrequirement aims to prevent reorganization solelyfor tax purposes. The typical cooperative reorgani-zation will have a clear business purpose.
Finally, while this section has provided someinformation and described implications that coop-erative leaders need to consider while examining aspecific merger, the financial transactions that canoccur during mergers, consolidations, and acquisi-tions are limitless. No specific steps can be ana-lyzed in depth for their tax consequences to cooper-atives, members, or patrons.
Thus, identifying all the tax consequences andimplications specifically related to such transac-tions is beyond the scope of this study. However,when complicated financial transactions arise dur-ing negotiations, leaders must analyze the relatedconsequences and implications. In these cases,cooperative leaders should seek professional exper-
26
tise and legal counsel so that suitable and accuratereorganization plans can be drawn.
SUMMARY AND IMPLICATIONSCooperative leaders examining merger need to
decide how to combine the major balance sheetcomponents of each merger participant. A planshould be developed to make the decision-makingprocess a well organized exercise. The plan shouldinclude alternative methods and their implications(i.e., positive and negative impacts) for combiningassets, liabilities, and equity given the merger situa-tion and attributes of the cooperatives involved.
Assets may be combined using book values orsome situations may dictate that assets be reevalu-ated. Leaders need to carefully examine all theassets of the cooperatives involved in the mergerand determine which ones will be needed to oper-ate the unified organization.
The structure and types of liabilities will beexamined. Are the structures and debt levels simi-lar? Are any changes needed to alleviate major dif-ferences?
Alternative methods for combining memberequity must be studied because of the seeminglyendless variations of cooperative equity structureswith mergers. Equities may be identified and devel-oped in different ways, redemption plans may dif-fer, or cooperatives may be in different stages ofredemption.
Cooperative leaders must examine the differ-ences between the merger participants and thenconsider alternatives for consolidating memberequities. Then, they must recommend those alterna-tives that best fit the structure of the emergingorganization and have the best chance of being wellreceived by members. Narrowing the field of alter-natives will allow for closer assessment of the posi-tive and negative characteristics of each. A finalchoice must then be made.
Cooperatives merging with similar equitystructures and amounts will usually find the combi-nation of financial instruments to be rather straight-forward. Conversely, cooperatives with differentstructures and amounts may find that combiningfinancial elements is difficult and requires careful
examination of several options to find the bestmethod.
This report provides information, examples,and implications of 21 alternatives for consolidat-ing and handling member equity during coopera-tive mergers. Eleven general options and 10 actualcooperative merger case examples are described.
Cooperative leaders developing their ownmerger plans can study these options and caseexamples to identify similarities between the equitystructures with which they are working and thoseof the alternatives. With some modification, theymay wish to include some of the similar ones asalternatives in their plan or develop their own.
There are two schools of thought about com-bining equity during mergers. One is that mergingcooperatives should seek to achieve completeequality among members of each cooperative. Thesecond is that equity consolidation should beapproached from the perspective of building astronger cooperative for the future, rather than try-ing to attain complete equality for members of eachcooperative at the time of merger.
The best scenario would be one in which astrong equity base and financial position areachieved and equality between members is main-tained.
However, in most mergers, maintaining mem-ber equality is difficult. For instance, alternativesthat include redeeming or paying off a significantamount of member equity at the time of mergerwill not likely be equitable to all members. On theother hand, alternatives that include equity adjust-ments contingent on asset reevaluation and expect-ed cooperative performance will help to achievegreater member equality.
Acquisition is an option for combining cooper-ative organizations that can alleviate some of theproblems commonly confronting mergers. Whenone cooperative is significantly larger and financial-ly stronger, acquisition is often the only choice thelarge cooperative will even consider. In other cases,acquisition is often chosen because it is easier tocarry out.
Cooperative leaders should work to ensurethat they as well as their constituent members fully
27
understand the present-value versus face-valuerelationship of member equity.
If equity planned for future redemption is con-sidered as face-value debt and the merging cooper-atives have significantly different amounts of equi-ty (relative to assets), then ill will may developamong the membership. For proper disclosure andto thwart any potential negative feelings amongmembers, cooperatives should include a section inthe merger plan that explains how to correctly ana-lyze the present value of member equity.
Cooperatives developing a merger plan forcombining assets and equity must also consider anytax implications that coincide with alternatives inthe plan. In short, cooperatives reorganizing due tomerger or consolidation are subject to the rulesregarding corporate reorganizations. Most often,cooperative mergers and consolidations are statuto-ry mergers or consolidations. As such, cooperativesmust adhere to various statutory provisions. A planmust be developed for the reorganization to bewholly or partially tax free.
This report covers only some of the tax issuesand information regarding merging cooperatives.When mergers involve more complicated financialtransactions other issues will surface. Cooperativeleaders should consult legal counsel and accoun-tants when examining various asset, liability, andequity consolidation alternatives.
In a successful merger, members feel theirinterests have been well represented and protectedand that their relative stake in the new organizationis important. They also believe that the unifiedcooperative will have sufficient financial strengthto provide services for their benefit. The unifiedcooperative should develop an equity financingand redemption plan that assures a significantfinancial stake by members who are current users.
REFERENCESAbrahamsen, Martin A. and J. Warren Mather,Approaches and Problems In Merging Cooperatives. FCSInf. Rep. 54, USDA, Washington, DC, July, 1966.
Abrahamsen, Martin A., Cooperative BusinessEnterprise. McGraw-Hill, 1976.
Baarda, James, R., State Incorporation S tutu tes forFarmer Cooperatives, ACS Inf. Rep. 30, USDA,Washington, DC, October, 1982.
Clark, Erving, Esq. and Philip L. Erickson, Esq.,Taxation of Cooperatives, Tax Management Portfolios,Tax Management, Inc.-subsidiary of The Bureau ofNational Affairs, Washington, DC, 1984.
Cobia, David W., et al., Cooperatives in Agriculture.Prentice Hall, Englewood Cliffs, New Jersey 07632,1989.
Haskell, James E., Results and Methods ofFourMergers By Local Supply Co-ops. FCS Res. Rep. 8,USDA, Washington, DC, January, 1970.
Hatfield, Harlan K., David W. Cobia, Gordon W.Erlandson, and Lawrence E. Mack, Consolidation ofAllocated Equity for Merging Cooperatives PreviouslyOperating on a Revolving Fund. Dept. of Agr. Econ.,Misc. Rep. 96, North Dakota State Univ., April, 1986.
Matthews, Mary Beth, Financial Instruments Zssuedby Agricultural Cooperatives. ACS Res. Rep. 68,USDA, Washington, DC, March, 1988.
Rathbone, Robert C. and Roger A. Wissman, EquityRedemption and Member Equity Allocation Practices ofAgricultural Cooperatives. ACS Res. Rep. 124, USDA,Washington, DC, October, 1993.
Siphor, Erton, The Gene Revolution, The History ofCooperative Artificial Breeding in New York and NewEngland, 1938-2990. Eastern A.I. Cooperative, Inc.,Syracuse, New York, 1991.
Swanson, Bruce L., Merging Cooperatives: Planning,Negotiating, Implementing. ACS Res. Rep. 43, USDA,Washington, DC, January, 1985.
28
APPENDIX A-GLOSSARYTERMS/CONCEPTS
OF
Acquisition. The outright purchase of a coopera-tive’s assets by another cooperative. The purchasedcooperative’s members then join the other coopera-tive. Cooperative A acquires assets of CooperativeB; Cooperative B members join Cooperative A.
Allocated Equity. Equity assigned by amounts(based on proportion of patronage) to a member’saccount.
Base Capital Plan. Both an equity capital formationand redemption plan. Plan emphasizes both devel-oping a base amount of required equity and sys-tematically adjusting it to the current needs and topatrons’ use of the cooperative. A member’s equitycontribution is tied directly to use of the coopera-tive.
Certificate of Indebtedness. These certificates rep-resent obligations to repay money advanced bymembers, or resulting from the conversion of equi-ty investment held by members. Unlike the normalequity certificate, certificates of indebtedness areusually interest bearing.
Consolidation. Combining two or more businessesinto a new organization. It survives and the compo-nent firms cease to exist. A, B, and C form D; A, B,and C disappear; D survives.
Debenture Bond. A debenture bond is an unse-cured bond. Cooperative bonds are generally long-term and bear competitive interest rates. They areoften subordinated to other cooperative debt.
Member. An owner-user who meets cooperativemembership requirements and is entitled to votingprivileges.
Member equity. Ownership or risk capital in thecooperative generally arising from direct invest-ment, retained patronage refunds, per-unit capitalretains, and nonmember business. Members’investment or ownership in the assets of the coop-erative. Equal to total assets less total liabilities.
Merger. The absorption of one or more businessesby another firm. The survivor maintains its identity.Many of its organizational features are operated onan expanded basis, given its increased size andcapacities. A and B merge into C; C survives; A andB dissolve.
Nonstock Cooperatives. The equity capital of non-stock cooperatives takes the form of membershipand/or.capital certificates. Membership certificatesare fee oriented and represent membership in theorganization. Capital certificates supplement mem-bership certificates. They are similar to preferredstock. Capital certificates are sold directly to mem-bers, issued as part of patronage refunds, or sold tononmembers.
Reorganizations. In this report, reorganizationrefers to a range of actions associated with varyingdegrees of change in a cooperative’s capital struc-ture. Changes may be minimal for modifying thecapital structure component identity or major andresult from merger.
Revolving Fund. This type of systematic equityredemption plan usually follows a first-in, first-outformat. Cooperative pays or retires in cash the old-est outstanding equities when required net worthhas accumulated. The revolving fund returns previ-ous investments to patrons on a regular andchronological basis.
Stock Cooperative. Capital of a stock cooperative isdivided into shares of stock owned by members.Some cooperatives have only common stock whileothers have both common and preferred stock.Some stock cooperatives also issue other forms ofequity such as membership certificates, which mayor may not be owned by members. These coopera-tives usually restrict stock transfers to limit owner-ship of the cooperative primarily to qualifyingmember-patrons.
Unallocated equity. Equity not assigned to a mem-ber’s account. Tax-paid retained earnings orreserves.
29
APPENDIX &--CASE STUDY SURVEYQUESTIONS
Cooperative Merger Survey
0)
(2)
(3)(4)(5)
(6)
(7)
(8)
(9)
(10)
(11)(12)
(13)
(14)
(15)
(16)
What size were the participating cooperativesprior to merger (sales and assets)?What was the size of the new cooperative fol-lowing the merger (sales and assets)?Were any assets sold off during the merger?What assets were sold?How were the proceeds allocated or used?_ Pay existing debt_ Settle differences in member equities_ Satisfy members that were merger dis-
senters_ Minimize duplicate or unused assets_ Other, specifyWere the assets brought into the new coopera-tive at book value or revalued?How were assets reevaluated and who com-pleted the reevaluation?What was the short-term debt/total asset ratioof each participating cooperative prior tomerger?What was the long-term debt/total asset ratioof each participating cooperative prior tomerger?What was the total debt/total equity ratio ofeach participating cooperative prior to merger?Was any long-term debt restructured or paid off?How was debt restructuring handled andwhat was done?What type of equity redemption program didthe participating cooperatives have before themerger?If an equity revolvement schedule was ineffect, what was the revolving period?Were the cooperatives current in redeemingtheir equity? (If no, years behind?)Was a committee set up to negotiate howequity would be handled during the merger?
(17a) How many people were on the committee?
(17b) Who was on the committee? (mark all thatapply)_ Directors_ Members_ Management_ Personnel_ Attorney_ Accountant_ Other outside individuals
(18) How often did the committee meet?(19) How well did the committee perform its func-
tion?_ Performed very well_ Performed well_ Performed okay_ Did not perform well_ Was a waste of time
(20) What plan was followed forconsolidating/transferring the equity of themerging cooperatives? (brief summary)
(21) In general, where did information for devisingthe plan come from? (mark all that apply)_ Obtained from other cooperatives that
had merged_ Obtained from professional sources_ Obtained from reports or books_ Creativity--original idea
(22) Did the plan have member support?_ Strong support_ Moderate support_ Weak support_ No support
(23) What types of equity were issued by the partic-ipating cooperatives prior to the merger? (e.g.,common stock, preferred stock, membershipcertificates, unallocated equity, etc.)
(24) If applicable, please provide a numericalexample of how equity transfer/consolidationwas handled (e.g., formula used)
(25) What were some of the financial consolidationdifficulties experienced by the merging coop-eratives?
(26) How were these differences resolved?
30
~p~ndbc table I- Example A-l, prorating old allocated equity of Cooperative A and Cooperative B
Age inyears’
Allocated equity
Co-op A’ Co-op 8’Combined
equity4Percent of
7-year total5
Coop A Coop Bprorated prorated
equW equity’
Revised equity total
Coop Aa Coop Be Comb’0
9 7 5
8 60
7 50
6 125
5 100
4 7 5
3 55
2 110
1 80
Thousand dollars
65
100
55
200
125
150
250
95
100
140
160
105
325
225
225
305
205
180
Percent
7
9
6
17
12
12
16
11
10
8
10
7
20
14
14
18
13
11
Thousand dollars
9 83 7 4 157
11 70 111 181
8 57 63 120
21 145 221 366
15 114 140 254
15 89 165 254
20 73 270 343
14 123 109 232
12 91 112 203
Totals 730 1,140 1,870 100 115 125 845 1,265 2,110
Equity over9 years old
Total equity
115 125 240 0 0 0 0 0
845 1,265 2,110
1 Cooperative B has been revolving equity on a lo-year schedule (3 years behind its 7-year revoking fund plan) and Cooperative A has been revofving on a 12-yearschedule (3years behind its Q-year revolving fund plan). A Q-year schedule is chosen for the unified cooperative.
2 Allocated equity of Cooperative A--last 9 years and total allocated equity over 9 years old.3 Allocated equity of Cooperative B-fast 9 years and total allocated equity over 9 years old.4 Allocated equity from Cooperative A and Cooperative B added together for each year, overall, and old.5 Combined equity in each year of the Q-year period divided by the total equity of the 9 years.6 The $115 old equity of Cooperative A multiplied by the corresponding percent data in the preceding column.7 The $125 old equity of Cooperative B multiplied by the corresponding percent data.8 Revised equity of Cooperative A-original allocated equity (2nd column) plus prorated old equity.0 Revised equity of Cooperative B-original allocated equity (3rd column) plus prorated old equity.lo Combined revised equity totals of Cooperative A and Cooperative B.
mmda hbie 2-Multipliers-present value of $11
Years
(n) 1% 2% 3% 4%
Discount rate(r)
5% 6% 7% 8% 9% 10% 11% 12%
Present value multipliers
0 6c@J
78 86 92 102 11: 12z 13A$ 148 15; 16mG
17w 18: 19ulI," 20? 21z 22: 23al
24252627282930
0.990 0 .980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.8930 .980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.7970.971 0.942 0.915 0 .889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.7120.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.6360.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.5670.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.5070.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.4520.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.4040.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.3610.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.3220.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.2870.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.2570.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.2290.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.2050.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.1830.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.1630.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.1460.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.1300.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.1160.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.1040.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 0.0930.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.0830.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112 0.091 0.0740.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 0.0660.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.0590.772 0.598 0.464 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.0530.764 0.586 0.450 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.0470.757 0.574 0.437 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.0420.749 0.563 0.424 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.0370.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033
U.S. Department of AgricultureRural Business and Cooperative Development Service
Ag Box 3255Washington, D.C. 20250-3255
Rural Business and Cooperative Development Service (RBCDS) provides research,management, and educational assistance to cooperatives to strengthen the economicposition of farmers and other rural residents. It works directly with cooperative leadersand Federal and State agencies to improve organization, leadership, and operation ofcooperatives and to give guidance to further development.
The cooperative segment of RBCDS (1) helps farmers and other rural residents developcooperatives to obtain supplies and services at lower cost and to get better prices forproducts they sell; (2) advises rural residents on developing existing resources throughcooperative action to enhance rural living; (3) helps cooperatives improve services andoperating efficiency; (4) informs members, directors, employees, and the public on howcooperatives work and benefit their members and their communities; and (5)encourages international cooperative programs.
RBCDS also publishes research and educational materials and issues FarmerCooperatives magazine. The United States Department of Agriculture (USDA) prohibitsdiscrimination in its programs on the basis of race, color, national origin, sex, religion,age, disability, political beliefs and marital or familial status. (Not all prohibited basesapply to all programs). Persons with disabilities who require alternative means forcommunication of program information (braille, large print, audiotape, etc.) shouldcontact the USDA Office of Communications at (202) 720-7808 (TDD).
To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture,Washington, D.C. 20250, or call (202) 720-7327 (voice) or (202) 720-1127 (TDD). USDAis an equal employment opportunity employer.
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