ASSIGNMENT SET -1 1. What are the basic steps in Strategic Planning in Merger?


Cooperatives differ in their approach to mergers. In some cooperatives, the directors maintain a discouraging tone toward mergers, but would probably consider a merger if it were presented to them. In other organizations, the board may take a proactive role in aggressively pursuing a merger or acquisition opportunity. Decisions involving mergers and reorganization fall under the general category of strategic planning. Strategic planning involves answering questions such as: • What is the purpose of our organization? • Who do we serve? • What are our strengths, weaknesses, opportunities, and threats? • Where do we need to take this company? • How do we plan to get there? Viewing mergers and acquisitions within the context of strategic planning facilitates a proactive rather than a reactive approach. It may also help the cooperative avoid tying up too much time, energy, and effort in pursuing mergers at the expense of operations and other types of opportunities. The evaluation and negotiation of a merger are a major business decision. Your attorney, auditor, and banker are important sources of expertise and assistance. Other outside resources include business consultants, regional cooperatives, and university experts. Each merger situation is different, but most successful mergers involve the same basic steps: Step 1-Informal Discussion The first step of the process involves an informal discussion by the board of directors. The board should consider the history of the cooperative, the present status, and, above all, what the cooperative should do to survive, prosper, and meet members’ needs. The basic objective at this stage is to determine if further investigation is warranted. Some factors to consider at this stage include: How well do the business activities match the cooperative’s core areas? Do the trade areas fit together or side-by-side? Is the merger partner a viable, on-going concern? Does the

potential for merger merit a formal study? This stage of the merger process generally ends with the board’s passing a formal resolution to investigate a merger. Step 2-The Merger Steering Committee When the informal study and discussion by the board are favorable, the next step is to appoint a steering committee composed of board members from the two cooperatives. The committee should avoid any premature announcements concerning the merger study. Premature comments by the board as to the potential savings, the name of the merged cooperative, the closing of facilities, or potential personnel actions could kill an otherwise successful merger. Step 3-The Calendar of Events Most cooperatives use a “green light-red light” system in designing a calendar of events. The steering committee defines a calendar of events for the entire merger process and proceeds with each step, provided the results from the previous step indicate that a merger is feasible and beneficial. However, if the feedback from any step is unfavorable, the committee immediately abandons the merger or puts the merger activities on hold. The calendar of events might include: • Effective date for the merger • Target date for approval • Information meetings: membership, employees • Announcements: letters to membership, notification of meetings • Tour of facilities by steering committee • Recommendation by steering committee • Approval by board of directors at each cooperative • Presentation and approval at joint board meeting. Step 4-Formal Feasibility Study The most crucial step within the calendar of events is the formal feasibility study. The study should consider the last two years’ financial information for each organization as well as a projected balance sheet and statement of operations for the combined operation. The study should also include historic and projected financial ratios for the separate firms and the combined organization including:

• Current Ratio • Member Equity to Term Debt • Member Equity to Total Assets • Return on Assets • Expense Ratios Possible expense savings can be identified by a two-step process. First, the study should indicate what savings can be realized without making operational changes. Examples of this type of savings include reduction in insurance premiums or annual audit expenses. Secondly, the study should outline what savings can be generated through changes in operations. The elimination of a general manager, the elimination of a service station, or the combination of fuel delivery routes would be examples of this type of expense savings. In addition to the financial analysis, the membership characteristics of both cooperatives should be analyzed. Step 5-Negotiating the Agreement The actual merger agreement will reflect the unique situation facing each potential set of merger partners. Your cooperative’s attorney can assist you in codifying the actual contract terms. Specifying the exact terms of a merger or acquisition brings up a number of difficult issues. These include combining the equity retirement plans, combining the board of directors, deciding on a name for the merged cooperative, designing a program for unifying operations, and selecting a manager for the merged firm. The first step in combining the equity retirement plans is for the merger committee to examine both plans. The next step is to determine how difficult it would be to convert one plan into the other. A transition plan must be developed whenever conversation is possible. If the merger involves a financially stressed cooperative, the merger partner must determine how the equity will be valued. The main challenges in combining the boards of directors is in maintaining representation for all of the geographic areas and still have a workable number of directors on the board. Typically, a transition plan is established whereby some director positions are eliminated as their terms expire. Just as in establishing a personnel plan, it is important that all discussions focus on the positions and not on the individuals involved. If the merger is to be effective in reducing costs and maintaining service, a formal plan for unifying operations must be

established. Board members should avoid any premature discussion of the closure of specific facilities. However, unless specific goals for the merger are established and monitored, the potential savings will evaporate. The board should establish the general direction and strategy of the new merged firm. It is up to the manager of the new firm to implement specific staffing and operational changes. When selecting a manager for the merged firm, the board should carefully consider communication skills and the ability to delegate responsibility along with overall management capability. A manager who has been effective with a “hands-on” style may not be able to effectively manage a larger merged firm. Maintaining communication with the membership and with the employees represents the largest single challenge for the new manager. Step 6-Member Approval Stage If the merger is approved by the board, the next step is to present the issue to the membership. Communication is one of the keys to a successful merger. One manager put this as “take care of the `me’ issues.” Members, customers, and employees want to know what the merger will mean to them. Financial and feasibility information can be provided in condensed form. Informational mailings and/or informational meetings are often used at this point. Legal requirements concerning the notice of meetings and what constitutes a quorum for a merger vote must be strictly observed. The directors of both cooperatives should strongly urge approval by the membership through letters and personal appearances at informational meetings. It is important to keep employees informed. Good communication with employees protects productivity. When employees are well advised, the chances for a successful merger increase. As a rule, employees handle change much easier than they handle uncertainty. Step 7-Implementing the Reorganization If both memberships approve the merger, the formidable task of implementing the merger or reorganization occurs. The manager and directors should start managing the transition as soon as the deal is announced. Communication is extremely important at this stage. In addition to changes in specific operating areas, the merger will imply changes in credit policy, pricing policy, and numerous other areas of day today management. It is important to clearly inform the

membership of these changes and keep the emphasis on member service. The goal should be to communicate to every member that they are important to the cooperative. As the organization works through the host of transitional issues related to the merger, it is essential that the opportunities for reorganization, cost savings, and efficiency be aggressively pursued. The combined organization may demand changes in the management structure. More involved communication and control procedures may be needed. More formal and involved decision-making processes may also be needed. While it is unfortunate that these changes must be made at the time when the organization is struggling to cope with the integration of facilities, policies, and personnel; it does provide an opportunity to improve and upgrade the management process. The new organization may also need to revamp its budgetary process and improve its inventory and cash management systems. The final step in a merger is to monitor whether the merger achieved the strategic and operational objectives and to implement further changes.

All in all, a merger is, in itself, neither good nor bad. A cooperative should view a potential merger in terms of its overall mission to meet members’ needs. The success of a merger depends upon planning, careful study, and management. Attitudes toward mergers change as the business environment changes. Cooperatives which rejected a merger have later become involved in successful mergers. Other cooperatives which have merged have later split operations. However, according to a study by the Agricultural Cooperative Service, approximately 80 percent of cooperative mergers are classified as successful. The successful mergers tend to make a cooperative a more potent, competitive factor or halt the decline of one or more organizations or provide the organization with a base for future growth.

2. Write short notes: a. Spin Off Answer: The creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. A spin off is a type of divestiture. Businesses wishing to 'streamline' their operations often sell less productive or unrelated subsidiary businesses as spin offs. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.

b. Divestitures

Answer: A divesture is a partial or full disposal of an investment or asset through

sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on. In personal finance, investors selling shares of a business can be said to be divesting their interests in the company being sold.

3. Discuss Master Limited Partnerships MLP stands for Master Limited Partnership. MLPs are like REITs in the way they are structured for tax purposes. They pay no income tax, and instead pay out their income to their shareholders as dividends. To qualify as MLPs, they must generate 90% of their income from activities relating to real estate, natural resources (timber, mining, energy), or commodities. MLPs trade on the stock exchange just like shares of any other stock. One of the most popular MLP groups is pipelines. Below we list the leading MLP investments. A master limited partnership (MLP) is a publicly traded limited partnership. Shares of ownership are referred to as units. MLPs generally operate in the natural resource, financial services, and real estate industries. How It Works/Example: Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. However, the most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock. MLPs allow for pass-through income, meaning that they are not subject to corporate income taxes. Instead, owners of an MLP are personally responsible for paying taxes on their individual portions of the MLP's income, gains, losses, and deductions. This eliminates the "double taxation" generally applied to corporations (whereby the corporation pays taxes on its income and the corporation's shareholders also pay taxes on the corporation's dividends). MLPs make distributions that are similar to dividends, and these are generally paid out on a quarterly basis. It is important to note that cash distributions are not guaranteed, and every unit holder is responsible for the taxes on his or her proportionate share of income, even if the MLP does not pay a cash distribution.

Generally, investors can purchase MLP units from brokers. A unit holder’s initial tax basis in MLP units is generally the amount he or she pays for the units. The unit holder’s basis is

usually then decreased with each distribution and allocation for losses or deductions, and the basis is increased for each allocation of income. A portion of certain distributions may qualify as a return of the investor's capital, thereby reducing the unit holder’s taxable basis. When an MLP pays more in distributions than it earns in taxable income, the unit holder’s tax basis is decreased by the difference between the cash received and the MLP's taxable income. When the unit holder sells his or her units, any gain on the sale is taxed at the unit holder’s ordinary income tax rate.

MLPs must mail an IRS Schedule K-1 to each of their unit holders every year. This Schedule K-1 reports the unit holder’s allocated income, gain, loss, deduction, and credits. If the unit holder’s taxable partnership income for the year is negative, then this is considered a passive loss under the tax code and may not be used to offset income from other sources. Instead, the passive loss may only be used to offset future income from the same MLP. Although unit holders are generally limited in their liability, similar to a corporation's shareholders, creditors typically have the right to seek the return of distributions made to unit holders if the liability in question arose before the distribution was paid. This liability stays attached to the unit holder even after he or she sells the units. Why It Matters: The fact that master limited partnerships are not subject to income tax means that more cash is available for distributions than would be available had the company incorporated. This generally makes MLP units worth more than similar shares of a corporation. The size of an MLP's cash distributions generally drives the value of its MLP units. With this in mind, it is particularly important for investors to carefully evaluate whether an MLP is able to meet its current distribution obligations and whether it will be able to continue (and possibly even rise) its future distributions. If a particular MLP sports a distributable cash flow coverage ratio of 1:1, then this generally indicates that the MLP has adequate cash to meet its cash distribution requirements.

As a side note, the American Jobs Creation Act of 2004 added MLP income to the list of acceptable sources of income for mutual funds, with some conditions, including that mutual funds may not invest more than 25% of their assets in MLPs, nor may they own more than 10% of any one MLP.

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