Post-Merger Performance of
Agricultural Cooperatives
Timothy J. Richards and Mark R. Manfredo
Abstract
During the 1990s, the rate of consolidation
among agricultural cooperatives, including
mergers, acquisitions, strategic alliances,
and joint ventures, increased significantly.
While post-merger performance has been
examined extensively for investor-owned
firms, this has not been the case for
agricultural cooperatives, primarily
because these firms do not have an explicit
profit motive or publicly traded stock.
Results from a two-stage econometric
model reveal that a major motivation for
cooperatives to engage in these activities is
to circumvent capital constraints.
Furthermore, the decision to merge and
financial performance are jointly
endogenous, with profitability positively
influenced and sales growth negatively
influenced by the likelihood of merger.
Key words: acquisitions, capital constraints,
cooperatives, financial performance, joint
ventures, mergers, multinomial logit
modeling, strategic alliances
Timothy J. Richards is associate professor and Power
Chair of Agribusiness, and Mark R. Manfredo is
assistant professor, both in the Morrison School of
Agribusiness and Resource Management, Arizona State
University East, Mesa, AZ. Financial and technical
support from the Rural Business Cooperative Service
of the USDA, and the helpful comments from James
Eaves, are gratefully acknowledged. The views
expressed here do not necessarily represent those of
the Rural Business Cooperative Service or the U.S.
Department of Agriculture.
During the late 1990s, agricultural
cooperatives went through a period of
rapid consolidation. As shown by Figure 1,
there were an average of 36.6 mergers,
acquisitions, strategic alliances, or joint
ventures per year between 1980 and 1989.
In contrast, this average rose to 47.6
between 1990 and 1998. While recent
studies attribute this trend to internal
factors such as capital constraints,
liquidity, and profitability, and to
external factors such as economic
growth, competitor mergers, vertical-
channel mergers, and interest rates
(Adams, Love, and Capps; Adelaja, Nayga,
and Farooq), there has been very little
research into the impact of post-merger
financial performance.1
Post-merger performance of publicly
traded firms is relatively easy to
measure, given public access to
detailed financial statements, the
observability of share prices, and
standards for pricing corporate assets
via the capital asset pricing model (CAPM)
or similar pricing models (Jensen and
Ruback; Rau and Vermaelen; Franks,
Harris, and Titman; and many others).
However, cooperatives are not publicly
traded, do not have an explicit profit
motive, nor are they obligated to share
financial information with the general
1
While mergers, acquisitions, joint ventures, and
strategic alliances are all considered alternative forms
of consolidation, note that joint ventures and strategic
alliances are fundamentally different from the other
two as they do not require any formal exchange of
ownership or capital of any form. They do, however,
represent a means by which a cooperative can extend
itself into another line of business or another market
with the resulting change in business profile.
176 Post-Merger Performance of Agricultural Cooperatives

80

70
Number of Transactions

60

50

40

30

20

10

0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Source: The Food Institute, Food Business Mergers and Acquisitions (2000).

Figure 1. Total Number of Mergers, Acquisitions, Strategic Alliances,

and Joint Ventures Among U.S. Agricultural Cooperatives: 1980S S1998

public.2 Consequently, assessing the post- better understand how consolidation may
merger performance of cooperatives is both impact their overall future competitiveness.
empirically and conceptually challenging.
Despite the fact that there is no public
Rigorous determination of the impact of market for cooperative equity, many
consolidation on cooperative performance indirect measures of managerial
is important for several reasons. First, performance are the same as for
unlike publicly traded firms, cooperative proprietary firms. In fact, in order to
performance cannot be determined achieve their objective of maximizing total
through changes in market valuation. member welfare (Fulton), cooperatives
Rather, the impact of consolidation on maximize profit in the same way as non-
member-owner welfare can only be cooperatives. Sales growth, cost per unit
measured indirectly through measures of of output, and operating profit are all
profitability or cash flow. Second, the critical measures of performance which
sheer volume of economic activity which are capitalized directly into the value of a
flows through cooperatives in the publicly traded firm, or indirectly into
agricultural sector demands that some the value of private firms that own
account be taken of how consolidation may cooperatives.3
impact the future growth and profitability
of merged entities. Third, because most Thus, the primary objective of this
cooperatives must compete for patronage research is to determine whether
with non-cooperatives, it is important to cooperatives that participate in various
consolidation activities—mergers,
2
acquisitions, strategic alliances, or joint
Although cooperatives do not have an explicit
profit motive, it is well understood in the theory of
ventures—perform better financially than
cooperative behavior that in order to maximize those that do not. To accomplish this
member-owner welfare, a cooperative’s conduct will be
isomorphic to that of a competitive, investor-oriented
firm. Less formally, cooperative managers often
3
communicate the importance they place on achieving Operating profit denotes profit prior to the
profit goals through annual reports and at members disbursement of surplus, or “patronage refunds” to
meetings. members.
Agricultural Finance Review, Fall 2003
objective, the study assesses the relative
importance of several financial attributes
(liquidity, leverage, efficiency, and
profitability) on the likelihood of a
cooperative participating in one of the
above transactions, and tests whether or
not cooperatives characterized as relatively
capital-constrained are more likely to
consolidate. This research also examines
whether the benefits derived from
cooperative consolidation, if any, appear
in terms of sales volume only, or if
profitability improves as well.
Economic Model of
Cooperative Performance
Despite the large amount of empirical
research concerning the returns to
shareholders of publicly traded firms
involved in either a merger or tender offer,
there remains considerable debate over
whether returns to the acquiring firm’s
shareholders are negative or positive.
While a target firm’s shareholders are
likely to earn abnormally positive
returns, acquiring-firm shareholders
tend to receive either zero returns or
significantly negative returns (Dodd and
Ruback; Langetieg; Asquith; Bradley,
Desai, and Kim, 1983, 1988; Jensen and
Ruback; Franks, Harris, and Titman;
Agrawal, Jaffe, and Mandelker; Loughran
and Vijh).
Each of the studies cited above compares
the returns to holding stock in an
acquiring firm to the benchmark
represented by what would be expected
for a firm of similar risk valued by an
equilibrium pricing model. Finding
systematic underperformance, therefore,
represents an anomaly that should not
exist if capital markets are efficient.
Consequently, empirical issues arise
regarding not only the question of
performance adequacy, but whether the
equilibrium pricing model is specified
correctly.
In general, poor returns performance
likely also reflects similarly disappointing
Richards and Manfredo 177
financial performance.4 Using various
measures of financial performance, there
is also considerable evidence showing
mergers or acquisitions fail to generate
the benefits expected by shareholders
(Ravenscraft and Scherer; Herman and
Lowenstein). However, in a study of
corporate performance following mergers,
Healy, Palepu, and Ruback found merged
firms experience improved asset
productivity and operating cash flows, and,
moreover, this improvement is rewarded
with super-normal shareholder returns.
In the absence of a market for cooperative
equity, there is no obvious means to
objectively value a cooperative, so this
study uses performance measures
calculated from cooperative financial
statements. Therefore, improved
profitability and sales growth are assumed
to reflect higher welfare for cooperative
member-owners. Typically, the
justification given for mergers,
acquisitions, joint ventures, or strategic
alliances among publicly traded firms
relies on one of three potential sources of
gain: (a) improvements in operational
efficiency, (b) improved market power, or
(c) improved financial flexibility. While the
first two of these benefits are direct, the
third operates indirectly by relaxing the
capital constraint under which many
cooperatives operate.
The direct benefits of consolidation are
similar to those used to justify mergers
among proprietary firms. In their review
of studies completed prior to the early
1980s, Jensen and Ruback found that any
4
As a reviewer notes, some cooperative mergers or
other forms of consolidation may occur for reasons
other than financial performance, and such non-
financial benefits (services, risk management, etc.) are
necessarily unmeasurable. However, in order to
remain financially viable, cooperatives must remain
economically efficient and generate positive returns to
their members. If cooperatives maximize the combined
producer surplus of their member-owners and the
consumer surplus of their member-users, they will
maximize returns in a financial sense as well.
Moreover, our econometric models reflect average
cooperative behavior, so such non-financial objectives
are necessarily included in the regression error term.
178 Post-Merger Performance of Agricultural Cooperatives
positive wealth effects resulting from
mergers are due to the realization of
untapped economies of scale or synergies,
and not by the creation of market power.
Other potential sources of operational gain
include efficiencies created through
vertical integration, access to key
personnel or organizational resources, or
through a reduction in agency costs (Klein,
Crawford, and Alchian). Furthermore, if a
cooperative is able to link to another
cooperative or proprietary firm that offers a
complementary product line, it will be able
to improve both category and geographic
market coverage.
Such marketing or strategic synergies are
often cited as a source of gains from
mergers among publicly traded firms
(Bradley, Desai, and Kim, 1983, 1988;
Agrawal, Jaffe, and Mandelker). Acquiring
additional production capacity or making
better use of existing capacity may indeed
be key sources of such scale economies.
However, in contrast to evidence cited by
Jensen and Ruback, increases in market
power may be obtained directly by merging
with or acquiring another cooperative in
the same market as a result of gaining
access to a strong brand, removing a rival
from the market, or gaining leverage with
input suppliers or buyers. Therefore,
potential gains through cooperative
mergers suggest cooperative owners
have all the same motivations to merge
as those of publicly traded firms, plus
some additional motivations unique to
cooperatives.
In particular, cooperatives are more likely
to find themselves capital constrained than
publicly traded firms. There are a number
of reasons why this is the case. First, few
cooperatives issue equity to the public
because to do so would be to sacrifice
control over the cooperative to outside
investors who are not necessarily patrons.
Second, although many cooperatives
generate positive surpluses on an operating
basis, the cooperative archetype is not-for-
profit. Third, any surplus a cooperative
does earn is eventually returned to
members through patronage refunds.
Any firm without access to sufficient
capital is likely to be less profitable than
otherwise—both for operational and
marketing reasons. If a firm is unable to
operate at minimum efficient scale, then
it cannot operate on a least-cost basis.
Further, cost complementarities which
are achievable only through producing
multiple products or offering multiple
services are a critical source of economies
of scope for cooperatives (Akridge and
Hertel).
With insufficient capital, a cooperative is
likely to provide a more limited product
line than it would prefer. Similarly, it will
be able to market this line to a smaller
geographic market than would be optimal.
Branding activities, such as consumer
advertising and promotion, retail
merchandising, and trade promotion, are
all highly capital-intensive activities that
are most efficiently allocated across a
number of different markets. The ability to
fund these programs has an effect on the
cooperative’s revenue as well. Product
differentiation, and market power more
generally, requires a significant investment
which is typically available only to better
capitalized proprietary firms. Without the
ability to mount a credible strategic threat
to a proprietary rival, cooperatives are
often subject to aggressive competition and
entry into key markets.
Access to capital is also necessary to be
able to either buy smaller rivals who pose
such a threat, or to absorb excess
production capacity. There is some
empirical support for the hypothesis that
capital-constrained firms are more likely
to merge with firms with better access to
capital. Hubbard and Palia, for example,
concluded the merger wave of the 1960s
was due in large part to weaker firms’
attempts to overcome institutional
problems that prevented them from
obtaining sufficient capital.
This study tests whether a lack of capital
is also responsible for mergers among
agricultural cooperatives by specifying the
probability that a cooperative engages in
Agricultural Finance Review, Fall 2003
some form of consolidation transaction as
a function of the implicit, or shadow value
of its capital stock. If a cooperative with
limited capital resources is able to
combine with another, better capitalized
cooperative, then the combined entity can
likely take advantage of more of the
benefits of consolidation outlined above.
A second test examines whether the
combined entity becomes more profitable
than its individual members as a result of
the larger capital pool available to both. A
third set of hypothesis tests determines
whether post-merger performance
improves as a result of operational
efficiencies created through better asset
management, economies of scale, utilizing
complementary assets, access to critical
organizational resources, or other
synergies. Finally, a fourth test
investigates whether cooperative owners
benefit through strategic or market power
effects.
Econometric Model of
Performance Measurement
Tests of each hypothesis are conducted
within a two-stage econometric model.
The first stage focuses on how capital
constraints impact the incentive of
cooperatives to engage in some form of
consolidation activity (e.g., merger,
acquisition, strategic alliance, or joint
venture). In the second stage, the
probability of consolidation activity from
the first stage is used to determine
whether financial performance of the
combined firm, as measured by return on
assets (ROA) and sales growth, actually
improves after the merger. The following
discussion outlines the specifics of this
two-stage modeling effort.
Stage I
In the first stage of the model, a measure
of each cooperative’s capital constraint is
needed. However, the potential capital
constraint faced by any firm is an
Richards and Manfredo 179
unobservable variable. Therefore, a
proxy variable for a cooperative’s capital
constraint must be estimated. Since
capital is a fixed factor of production in
the short run, a dual restricted profit
function provides an expression for the
shadow value of capital. Thus, a profit
function is estimated with the shadow
value of capital serving as a measure of
the firm’s capital constraint. Specifically,
the shadow value of capital represents
the implicit value of a firm’s capital
constraint if capital is indeed a binding
constraint.
Of the many candidates for a suitable
functional form for the profit function, the
generalized Leontief (GL) has many
desirable attributes and is widely used
(Diewert; Lopez).5 Thus, the profit function
for a representative cooperative is specified
as (Morrison):
N N
(1) Bc ( p*K, () ' j j (ij ( pic pjc )½
i'1 j'1
N
% j "i pic Kc % gc ,
½
i'1
where p is an N-dimensional vector of
netput prices ( pi < 0 = input, pi > 0 =
output), Kc is a fixed factor, and gc is an
i.i.d. random variable for all cooperatives
(c) and time periods (t ).
In this profit function, the parameter " is
of particular interest. Taking the
derivative of (1) with respect to Kc , which is
the long-term debt-to-asset ratio, gives an
expression for the shadow value of capital
for each cooperative:
MBc N
(2) 8c ' ' (1/2) j "i pi Kc&½.
MKc i'1
5
The generalized Leontief (GL) offers the benefits of
linear homogeneity without normalization, while both
symmetry and convexity can be tested and imposed.
Convexity in prices requires the Hessian to be positive
semi-definite, while concavity in a single quasi-fixed
input requires the second derivative to be nonpositive
(Lopez). Further, because the GL is a flexible
functional form, it approximates any arbitrary
alternative.
180 Post-Merger Performance of Agricultural Cooperatives
Therefore, 8c is a firm-specific measure of
the value of the c cooperative’s capital
constraint. Since Kc is the ratio of long-
term debt to total assets, a higher
proportion of long-term debt relative to
short-term debt in a cooperative’s capital
stock represents a higher value of Kc , and
thus less of a constraint. Hence, the value
of 8c is positive if the capital constraint is
binding and is also expected to have a
positive effect on the probability of a
cooperative choosing some form of
consolidation activity.
This measure of the shadow value of
capital, 8c , is then used to determine if
capital constraints influence the
probability of some form of consolidation.
Since there are likely different motivations
by cooperatives for participating in either a
merger, acquisition, strategic alliance, or
joint venture, or maintaining the status
quo, 8c is included as an explanatory
variable in a multinomial logit model of
consolidation choice. Thus, the
multinomial logit model expresses the
likelihood or probability of these
consolidation activities occurring as a
function of various explanatory variables
including the shadow value of capital, 8c .
Including all consolidation activities in a
multinomial logit framework also provides
for efficient estimation, especially given the
relatively small data set available.
To derive the multinomial logit model, the
utility derived from consolidation consists
of a deterministic component (Vitk ) and a
random component (gkit ), such that:
(3) Uitk ' Vitk % gkit ' $i0 % j $ij Xijt
k k
% git ,
j
œ i ' 1, 2, ..., M; k ' 1, 2, ..., N,
where Xkit is a vector of attributes of both
choice i (e.g., merger, acquisition, joint
venture, strategic alliance) and chooser
k (the individual cooperative), including
8c estimated in equation (2) above. The
probability of choosing alternative i in
time period t depends upon the realization
of gki :
(4) P k (i * $) ' P Uitk & $i0 & j $ij Xijt
k k
> git ,
j
œ i ' 1, 2, ..., M; k ' 1, 2, ..., N,
or, assuming the error terms are i.i.d.
extreme value distributed, the probability
of choosing i becomes:
k
$i Xit )
exp($
(5) P(i* $) '
j exp($
k
$j Xjt )
j
for each alternative. Consistent estimation
of (5) maximizes the likelihood function,
N M
$) ' j j *i P k (i * $),
k
(6) L($
k'1 i'0
over N cooperatives and M choices, where
*ki = 1 if i = 1, and zero otherwise. When
estimating multinomial logit models, it is
necessary to normalize the response
coefficients of one choice to zero ($$i = 0), so
the remaining parameters are incremental
to the base case, defined here as a year in
which no activity occurs. Further,
estimating (6) in a fixed-cooperative-effect
framework allows for unobserved
heterogeneity in pooled time-series, cross-
section data. With this assumption, each
component of Xi has a common effect
across all cooperatives, but the intercept
varies among sample members.
In addition to 8c , several other variables
are included in Xkit which may explain the
likelihood of consolidation. Hypotheses
regarding the determinants of any type
of consolidation activity (mergers,
acquisitions, strategic alliances, and joint
ventures) suggest the probability of a
cooperative participating in any given year
is a function of its efficiency, profitability,
liquidity, growth, degree of financial
leverage as measured by its total asset
turnover ratio, return on assets, current
ratio, rate of growth of sales, and debt-to-
assets ratio, respectively. These hypotheses
follow from existing studies and well-
understood theoretical determinants of
merger and acquisition activity (Jensen
and Ruback; Adelaja, Nayga, and Farooq).
Agricultural Finance Review, Fall 2003
External factors, also included on the
basis of previous theoretical work, consist
of a measure of aggregate economic
activity (rate of GDP growth), the cost of
financing an acquisition (interest rate on
30-day T-bills), the rate of market value
growth of investor-owned firm (IOF) rivals
(rate of appreciation in the S&P 500 index),
and an indicator of any likely “merger
wave” activity in the agribusiness sector in
general as measured by the total number
of mergers among all agribusiness firms
(Golbe and White; Resende; Linn and Zhu;
Gort). Finally, most of the financial-
performance measures are likely to be
endogenous. Therefore, the activity-choice
model includes lagged values of each
variable so they are predetermined and thus
uncorrelated with the equation errors.
Stage II
The second stage of the modeling effort
examines cooperative financial
performance after some form of
consolidation activity occurs. Profitability,
measured as the return on assets (ROA),
and sales growth are regressed against the
same variables included in Stage I as well
as a binary variable indicating if the
cooperative has engaged in some form of
consolidation activity.6,7 Estimating both
6
Healy, Palepu, and Ruback use a measure of cash
flow, EBITDA (earnings before interest, taxes,
depreciation, and amortization), rather than profitability
because this value is not influenced by the method used
to finance the merger or acquisition. However, the data
necessary to construct this variable were not made
available to this study. The bias created by doing so is
likely to be small, however, because cooperatives have
fewer alternatives available for financing acquisitions or
mergers. Estimating the second-stage regression model
with basic earning power (BEP = EBIT/Assets) instead of
ROA produced results qualitatively identical to the ones
reported here. This is because our regression includes
the debt-to-assets ratio, which accounts for the
difference in the two measures of performance. We
thank a reviewer for pointing out the importance of
measuring cooperative performance with cash flow.
7
Sales growth is measured as the year-to-year
change in sales for the year following the transaction
relative to the year in which it is consummated.
Return on assets (ROA) is calculated for the year after
the merger is completed. Therefore, the definition of
ROA allows at least a full year to reorganize and
reoptimize for the new asset base.
Richards and Manfredo 181
of these functions in a simple ordinary
least squares (OLS) regression framework,
however, results in biased and
inconsistent parameter estimates since
the binary variable is endogenous, and
profitability and sales growth are
simultaneously determined. Therefore,
Lee’s correction method is used where the
second-stage model includes a correction
factor for choice i to account for the
probability that this choice is made in the
first stage (Lee; Greene). This procedure
also corrects for both sample selection
bias and the standard-error bias resulting
from using an estimated regressor in a
two-step estimation, and also accounts
for the joint endogeneity of sales growth
and profitability.
In general notation, the structure of the
second-stage model is written as:
(1N x )
21 N H1 ((
(7) q1 ' $1N z1 % *1 q̂2 % ,
(1N x )
M H1 ((
(2N x )
22 N H2 ((
q2 ' $2N z2 % *2 q̂1 % ,
(2N x )
M H2 ((
where N is the standard normal probability
density function (PDF), M is the standard
normal cumulative distribution function
(CDF), Hj is the inverse of the standard
normal CDF evaluated at Pr[i], the zi are
vectors of exogenous financial and
operating variables, and q̂ l is the fitted
value of performance measure l (Greene).
Fitted performance values are found by
regressing each measure (sales growth and
ROA) on a set of instrumental variables,
which consists of all exogenous and
predetermined variables in the model
including the probability of consolidation.
Data and Methods
To explain the financial motivations behind
cooperative merger and acquisition activity,
this study uses three separate data sets:
(a) a qualitative log of consolidation activity,
(b) financial data for all U.S. agricultural
cooperatives, and (c) macroeconomic data
182 Post-Merger Performance of Agricultural Cooperatives
describing economic conditions in
agriculture and the financial markets more
generally.
First, the qualitative data set consists of
the identities of firms involved in some
form of consolidation transaction, the
nature of each transaction, and the date
on which it occurred. These data were
obtained from a variety of data vendors
and media sources over the sample period
1980S1998. The Food Institute provides
profiles of all mergers in the food and
beverage industry in its Food Business
Mergers and Acquisitions publication. This
information was combined with reports of
activity among cooperatives in Rural
Cooperatives, published by the U.S.
Department of Agriculture/Rural Business
Cooperative Service (USDA/RBS), and
from a wide variety of trade media
accessed via the Lexis-Nexis database tool.
Once cooperatives involved in these
transactions were identified from this
database, detailed financial and operating
data of the participating firms were
obtained from the USDA/RBS Top 100
Cooperatives database. In order to ensure
confidentiality, these data do not include
specific identities of the merging
cooperatives, and the data exist only in
ratio form.8 Financial data from the Top
100 Cooperatives database were used both
in the structural merger model and in
estimating the shadow value of capital.
These data are summarized in Table 1.
The shadow value of capital is embedded
in the first-stage multinomial logit model,
which is then estimated across all sample
cooperatives. Although the Top 100
Cooperatives financial statements provide
direct measures of financial performance
(i.e., return on assets and sales growth),
they do not include firm-specific prices on
either outputs or inputs. Therefore,
8
This represents a limitation of the data, as it is not
possible to directly infer size differences among the
cooperatives. Therefore, it is implicitly assumed that
each of the hypothesized effects are size neutral.
annual, sectoral output prices were
obtained from the U.S. Department of
Labor/Bureau of Labor Statistics’ Producer
Price Index database, and input prices
from the same source, but not on a sector-
specific basis. Real interest rates, a
measure of the cost of capital, are from
the U.S. Federal Reserve Board. In
estimating the shadow value of capital,
each cooperative’s stock of capital is
measured by the ratio of long-term debt
to assets.
The second-stage (performance) model
uses both firm-specific data from these
financial statements and the Federal
Reserve’s macroeconomic data. Growth
in real gross domestic product is
calculated from raw data obtained from
the Federal Reserve, which also provides
the interest rate data (90-day U.S.
government T-bill yield). The value of U.S.
agricultural output is from the USDA’s
Agricultural Statistics database, and is
defined on a sectoral basis. S&P 500 stock
index data are from Commodity Systems,
Inc. The number of mergers, acquisitions,
and other transactions among
cooperatives and agribusinesses in general
are from the transactions database
assembled from the Food Institute’s Food
Business Mergers and Acquisitions data
and the other sources described above.
Because of the short time span of the
panel data set, all variables are measured
in nominal terms.
A number of specification tests are used
to assess the appropriateness of the two-
stage econometric procedure. First, the
goodness-of-fit for the multinomial logit
model is determined by comparing the
log-likelihood function of the complete
model to that of a naive model with no
explanatory variables. Second, a joint test
of significance of the parameter vector
which defines the shadow value of capital
is used to assess whether capital
constraints are relevant to a cooperative’s
decision to either merge, make an
acquisition, form a strategic alliance, or
enter a joint venture.
Table 1. Cooperative Financial Data Summary, 1980S
S1998
Mean
Variable Definition Unit (Std. Dev.) Minimum Maximum Source

Asset Turnover Sales/Total Assets % 3.258 0.360 12.650 USDA/Rural Business

(1.809) Cooperative Service
Return on Assets (ROA) Net Income/Total Assets % 0.035 !0.200 0.450 USDA/Rural Business
(0.051) Cooperative Service
Current Ratio Current Assets/Current Liabilities % 1.387 0.560 4.790 USDA/Rural Business
(0.426) Cooperative Service
Sales Growth (Sales t – Sales t–1 )/Sales t % 0.049 !0.630 3.330 USDA/Rural Business
(0.214) Cooperative Service
Debt-to-Assets Ratio Long-Term Debt/Total Assets % 0.626 0.140 1.130 USDA/Rural Business
(0.130) Cooperative Service
COGS-to-Assets Ratio Cost of Goods Sold/Total Assets % 2.880 0.130 12.220 USDA/Rural Business
(1.856) Cooperative Service
GDP Growth (GDP t – GDP t–1 )/GDP t % 0.066 0.032 0.120 U.S. Federal Reserve Board
(0.022)
S&P 500 Growth (S&P500 t – S&P500 t–1 )/S&P500 t % 0.135 !0.097 0.341 Commodity Systems, Inc.
(0.128)
Interest Rate Yield on 90-day T-bill % 0.068 0.030 0.140 U.S. Federal Reserve Board
(0.026)
Value of M&A Total value of all consolidation $ 87.478 56.00 157.00 The Food Institute
transactions in agriculture (23.870)
Value of Output Total farm value of all farm output $ 179.170 144.33 231.17 USDA, Agricultural Statistics
(26.745)
184 Post-Merger Performance of Agricultural Cooperatives
Third, a t-test of the significance of 21 in
each regression provides a way to test
whether Lee’s two-stage correction method
is indeed necessary and whether the
decision to consolidate is endogenous to
realized financial performance. Namely,
in the profitability equation, a positive 21
parameter estimate suggests merging
cooperatives perform better than those
that do not, while a positive estimate of 22
in the sales growth equation indicates
merging firms are likely to grow faster,
holding profitability constant.
In conducting these tests, the first-stage
multinomial logit model is estimated using
maximum likelihood, while the second-
stage financial performance model is
estimated using 3SLS with all exogenous
and predetermined variables as
instruments. In addition to the shadow
value of capital for each cooperative, the
second-stage model also includes binary
indicators to control for any unobserved
heterogeneity between industrial sectors;
however, a random-effects specification
across individual cooperatives is rejected.
All of the estimated results, therefore, are
interpreted as conditional on the type of
cooperative, whether dairy, input supply,
cotton, grain, diversified, fruit and
vegetable, sugar, or meat and poultry.9
Results and Discussion
The multinomial logit specification test
produces a likelihood ratio of 695.028
(Table 3) with 64 restrictions, thus
rejecting the naive-model null hypothesis.
Clearly, the multinomial logit model
provides an acceptable fit to the data. The
shadow value of capital is then calculated
with a Wald (chi-square) test. Maintaining
a restricted generalized Leontief functional
form for the profit function (1) above, the
mean value for 8 is 37.757 with a t-ratio of
10.996 (Table 2). This result suggests the
shadow value of capital is positive and
9
The precise association of each variable with a
particular sector is not disclosed in order to protect the
identities of the cooperatives in each.
Table 2. Shadow Value of Capital
Estimates
Variable Coefficient t-Ratio
( py /Kc )½ 0.250 0.946
½
( px /Kc ) 0.512* 2.576
1
( px /Kc )
2
½
3.324* 4.285
( px /Kc )½
!1.035* !4.667
3
8 37.757* 10.996
Notes: An asterisk (*) denotes statistical
significance at the 5% level. The value of 8 is
calculated from the other parameters, and its
standard error is found using a Wald P2 test on
text equation (3). Among input variables, x1 =
fuel, x2 = power, and x3 = labor.
plays an important role in the decision to
consolidate. Further, the positive value for
8 implies that capital represents a binding
constraint for the average cooperative, and
the standard error indicates, if normally
distributed, the shadow value would rarely
be negative for any cooperative.
Concavity of the profit function in each
quasi-fixed input requires positive shadow
values for all observations. In these data,
8 is positive in 77% of the observations, so
although not completely consistent with
the theoretical restrictions, violations
represent very plausible departures from
the profit-maximization axioms that
underlie duality. Therefore, no attempt
was made to constrain these values to be
uniformly positive. Negative shadow
values, or violations of concavity, are
interpreted as instances where the
constraint is nonbinding. To preserve the
continuous nature of this variable, however,
negative values are not restricted to zero.
Table 3 shows the multinomial logit
parameter estimates, while Table 4 presents
the associated choice elasticities.10
10
The elasticities are defined as the percentage
change in the expected probability of observing y = 1
for a given percentage change in each regressor:
0 jk = M log Pr[ y = k ]/M log(xj t ). It is well known (Greene)
that the structural parameters of a multinomial logit
model lack intuitive content; thus, focus is placed on
these elasticities.
Agricultural Finance Review, Fall 2003 Richards and Manfredo 185

Table 3. Parameter Estimates of Multinomial Logit Model of Consolidation Activity

Merger Acquisition Strategic Alliance Joint Venture
Variable Estimate t-Ratio Estimate t-Ratio Estimate t-Ratio Estimate t-Ratio

Constant !4.404 !1.447 !0.159 !0.081 !5.135* !2.030 !0.885 !0.351

Asset Turnover 0.391* 3.320 0.288* 3.161 0.237* 2.110 0.450* 4.199
ROA !6.349* !2.659 3.532 1.435 !1.986 !0.613 !1.767 !0.525
Current Ratio !0.327 !0.543 0.192 0.564 0.143 0.342 !0.478 !1.036
Sales Growth 1.233* 2.080 1.030* 2.096 0.415 0.566 1.254* 2.180
Debt-to-Assets Ratio !3.803 !1.742 !1.585 !1.109 !0.703 !0.389 !3.965* !2.045
GDP Growth 4.904 0.414 0.803 0.098 0.785 0.076 44.165* 3.089
S&P 500 Growth 1.035 0.875 1.447 1.606 3.077* 2.763 4.218* 3.421
Interest Rate 5.161 0.470 !2.285 !0.282 7.476 0.763 !40.282* !3.212
Value of Merg. & Acquis. 0.065 1.322 0.031 0.936 0.011 0.275 0.098* 2.202
Value of Output 0.012 1.283 !0.005 !0.771 0.013 1.567 !0.001 !0.086
8 0.025* 2.015 0.034* 3.250 0.027* 2.157 0.036* 2.768
Sector 1 0.676 1.043 !0.230 !0.574 !0.454 !0.823 !0.358 !0.691
Sector 2 0.946 1.594 !0.443 !1.200 0.027 0.059 !0.510 !1.109
Sector 3 3.598 5.473 2.997* 7.358 3.065* 6.374 3.627* 7.342
Sector 4 0.178 0.278 !0.380 !1.076 !0.216 !0.515 !1.525* !2.277

Likelihood-Ratio Statistic = 695.028

Notes: An asterisk (*) denotes statistical significance at the 5% level. We cannot disclose the precise association
of each variable with the particular sector in order to protect the identities of the respective cooperatives. The
likelihood-ratio test statistic is chi-square distributed under the null hypothesis that all $ parameters are equal
to zero, with the number of restrictions equal to the number of parameters. The sector descriptions are
suppressed to preserve the anonymity of cooperatives within each.

Table 4. Choice Elasticities for Consolidation Activities

Merger Acquisition Strategic Alliance Joint Venture
Variable gM j t-Ratio gA j t-Ratio g SA j t-Ratio g JV j t-Ratio

Asset Turnover 0.756 1.435 0.511 1.337 0.390 1.246 0.894 1.467
ROA !0.171 !0.665 0.096 0.674 !0.053 !0.652 !0.047 !0.649
Current Ratio !0.326* !2.062 0.201* 2.433 0.152* 2.486 !0.480* !2.112
Sales Growth 0.031 0.241 0.024 0.235 0.004 0.123 0.032 0.241
Debt-to-Assets Ratio !1.531* !2.248 !0.521* !2.649 !0.119 !0.652 !1.605* !2.267
GDP Growth 0.147 0.973 !0.056 !0.680 !0.057 !0.693 2.084 1.939
S&P 500 Growth 0.041 0.554 0.078 0.730 0.223 0.883 0.325 0.906
Interest Rate 0.311* 2.490 !0.065 !0.672 0.428* 2.345 !1.982 !1.827
Value of Merg. & Acquis. 0.359 1.626 0.139 1.305 0.013 0.245 0.570 1.707
Value of Output 1.465* 3.164 !0.754* !3.493 1.528* 3.175 !0.172* !1.979
8 0.029* 4.531 0.016* 6.299 0.022* 16.418 0.028* 5.918

Notes: An asterisk (*) denotes statistical significance at the 5% level. All elasticities are calculated from the
MNL coefficients in Table 1 and are evaluated at the mean of each variable. We cannot disclose the precise
association of each variable with the particular sector in order to protect the identities of the cooperatives in
each.
186 Post-Merger Performance of Agricultural Cooperatives
As is the case with all multinomial logit
models, estimating the effect of each
choice attribute leads to a proliferation of
parameter estimates. From the results in
Tables 3 and 4, the most important
determinant of consolidation is the value
of the capital constraint facing a
cooperative. In each case, the marginal
impact is both statistically significant and,
by the value of the elasticity, economically
important as well. Therefore, this result
suggests cooperatives that possess limited
capital resources, relative to their
opportunities for profitable investments,
are likely to seek additional investment
flexibility by acquiring less-constrained
cooperatives.
Among internal factors, asset management
efficiency, as measured by total asset
turnover, is positively related to the
probability of observing all types of
activity. Because the excluded alternative
in this model is the choice of “doing
nothing,” cooperatives that are already
operationally efficient seek to consolidate
out of a position of strength, perhaps to
extend their reach geographically,
vertically in the marketing channel, or to
increase market power. This interpretation
is supported by the positive impact of sales
growth on the probability of a merger, and
is also consistent with the common
perception that cooperatives tend to
combine with others when they can
potentially obtain a more dominant market
or membership position.
Among macroeconomic factors, the
probability of observing a merger rises with
the total value of agribusiness mergers and
the total value of agricultural output in
general, although these two relationships
are statistically significant only at a lower
level of confidence. In most sectors,
cooperatives must compete with IOF rivals.
If non-cooperative rivals find it
advantageous to grow by merging with or
acquiring others in the same industry,
cooperatives feel significant competitive
pressure to do the same. However, this
result does not find much support in the
other types of activity. Further, higher
equity prices are also associated with
increasing rates of cooperative participation
in strategic alliances and joint ventures.
Whereas proprietary firms use inflated
equity prices as currency to facilitate
mergers, this option is not available to
cooperatives, so the effect captured here is
likely an indirect one. Specifically, as
publicly traded rivals use high equity
valuations to consolidate at a faster pace,
cooperatives are forced to seek some form
of affiliation or lose competitiveness.
There are also many factors observed to
reduce the likelihood of consolidation. In
particular, as ROA rises, cooperatives are
less likely to merge, perhaps because more
profitable cooperatives are more lean and
focused on operating results rather than
size. Further, in two cases (mergers and
joint ventures), cooperatives with higher
debt-to-assets ratios are less likely to
consolidate. While merging cooperatives
are often required by their partners to
have financial flexibility, the joint-venture
result is somewhat surprising because
they typically involve no formal exchange
of capital. However, it may be the case
that the financial commitment to a venture
may serve as an effective deterrent to
participation. Indeed, the likelihood of
forming a joint venture falls as interest
rates rise because many joint ventures are
relatively capital intensive. Although
proprietary firms should exhibit a similar
effect, it is especially strong for
cooperatives because any transaction is
likely to be financed with debt. Similarly,
illiquid cooperatives are also less likely to
participate in either a merger or joint
venture. Cooperatives with more working
capital could perhaps achieve the same
ends through an acquisition or strategic
alliance instead.
In the second-stage model, performance
cannot be defined in terms of a single
metric, because tradeoffs can be made
between growth and profitability. For
example, restructuring may improve
profitability, but often at the cost of slower
sales growth, which, of course, may lead to
lower profitability in the future. For this
Agricultural Finance Review, Fall 2003 Richards and Manfredo 187

Table 5. 3SLS Model of Cooperative Post-Merger Performance: ROA and Sales Growth
ROA Sales Growth
Variable Estimate t-Ratio Elasticity Estimate t-Ratio Elasticity

Constant 0.096* 5.290 !0.647* !7.412

Asset Turnover 0.011* 2.409 1.020 !0.002 !0.576 !0.166
Current Ratio !0.004 !0.971 !0.153 0.057* 3.105 1.639
Debt-to-Assets Ratio !0.175* !12.386 !3.062 0.390* 5.684 4.959
GDP Growth 0.090 1.510 0.169 1.270* 4.608 1.728
Value of Output 0.000* 3.336 0.843 !0.001* !3.002 !3.551
COGS-to-Assets Ratio !0.008 !1.701 !0.625 — —
Output Price — — 0.003* 5.522 7.801
Sales Growth 0.072* 12.091 0.099 — —
ROA — — 1.607* 12.326 1.166
Prob(Merger) !0.374* !10.088 !0.425 1.618* 9.304 1.335
Sector 1 0.012* 2.770 0.043 0.039 1.842 0.100
Sector 2 0.036* 9.027 0.315 !0.100* !5.218 !0.634
Sector 3 0.037* 6.692 0.074 !0.141* !5.460 !0.207
Sector 5 !0.001 !0.375 !0.009 0.026 1.581 0.123

R2 0.318 0.129

Notes: An asterisk (*) denotes statistical significance at the 5% level. The sector descriptions are suppressed
to preserve the anonymity of cooperatives within each.

reason, cooperative performance is defined
both in terms of return on assets and sales
growth.
Examining the results obtained by
estimating separate post-consolidation
financial performance models for each type
of consolidation activity, Tables 5S8 show
that cooperatives which are more efficient,
both in terms of asset turnover and cost of
goods sold, are also more profitable.
Because many are active in both input
supply and marketing, cooperatives also
benefit from sector-wide prosperity, as
indicated by the fact that profitability in
most cases rises in the value of
agricultural output. Even after allowing
for the value of output, however,
profitability varies widely among
cooperatives in different sectors.
Consistent with the hypothesis that capital
constraints provide a key motive for
consolidation, firms with lower debt-to-
asset ratios tend to be more profitable
when proper account is taken of the
likelihood of consolidation through Lee’s
correction procedure. These results also
suggest the two performance measures are
not mutually exclusive, as cooperatives
with faster sales growth tend to be more
profitable.
Most significantly, however, these results
lend some (albeit limited) support to the
hypothesis that consolidation reduces the
extent of any capital constraint, thereby
allowing a cooperative to improve its
financial performance. If the likelihood of
participating in a merger has a positive
impact on the performance measure in
question, then consolidation can be
interpreted as welfare-increasing to
cooperative member-owners.
With respect to mergers and joint
ventures, the results show consolidation
allows a cooperative to grow faster, but not
necessarily become more profitable. For
mergers, this is likely a result of the
difficulty of assimilating the other firm
within a short period of time, while many
joint ventures may simply be ill-conceived
and difficult to manage effectively with
another party.
188 Post-Merger Performance of Agricultural Cooperatives

Table 6. 3SLS Model of Cooperative Post-Acquisition Performance: ROA and Sales Growth
ROA Sales Growth
Variable Estimate t-Ratio Elasticity Estimate t-Ratio Elasticity

Constant 0.131* 7.190 !0.796* !9.309

Asset Turnover 0.010* 1.996 0.881 0.006 1.443 0.401
Current Ratio !0.005 !1.219 !0.201 0.037 1.982 1.065
Debt-to-Assets Ratio !0.094* !13.305 !3.409 0.288* 4.131 3.664
GDP Growth 0.100 1.593 0.187 1.886* 6.784 2.565
Value of Output 0.000 0.612 0.153 0.000 !1.155 !1.328
COGS-to-Assets Ratio !0.009 !1.821 !0.697 — —
Output Price — — 0.004* 6.043 8.636
Sales Growth 0.049* 7.791 0.067 — —
ROA — — 1.014* 7.888 0.736
Prob(Acquisition) 0.024 1.025 0.067 0.799* 7.683 1.606
Sector 1 0.003 0.616 0.010 0.079* 3.839 0.203
Sector 2 0.026* 6.397 0.223 !0.022 !1.215 !0.142
Sector 3 0.008 1.099 0.016 !0.211* !6.450 !0.309
Sector 5 0.000 !0.110 !0.003 0.054* 3.145 0.250
2
R 0.284 0.142

Notes: An asterisk (*) denotes statistical significance at the 5% level. The sector descriptions are suppressed
to preserve the anonymity of cooperatives within each.

Table 7. 3SLS Model of Cooperative Strategic Alliance Performance: ROA and Sales Growth
ROA Sales Growth
Variable Estimate t-Ratio Elasticity Estimate t-Ratio Elasticity

Constant 0.105* 5.487 !0.815* !8.900

Asset Turnover 0.011* 2.237 0.979 0.010* 2.252 0.640
Current Ratio !0.002 !0.437 !0.071 0.067* 3.475 1.902
Debt-to-Assets Ratio !0.175* !11.738 !3.069 0.407* 5.656 5.180
GDP Growth 0.074 1.215 0.139 1.539* 5.460 2.093
Value of Output 0.001* 2.442 0.685 0.000 !0.423 !0.536
COGS-to-Assets Ratio !0.009* !2.008 !0.762 — —
Output Price — — 0.003* 5.264 7.689
Sales Growth 0.051* 8.431 0.070 — —
ROA — — 1.137* 8.584 0.825
Prob(Strategic Alliance) !0.130* !4.184 !0.224 !0.081 !0.557 !0.102
Sector 1 0.002 0.444 0.007 0.087* 4.111 0.223
Sector 2 0.026* 6.540 0.225 !0.040* !2.126 !0.253
Sector 3 0.029* 4.565 0.058 !0.026 !0.875 !0.038
Sector 5 !0.003 !0.715 !0.018 0.027 1.542 0.124

R2 0.292 0.295

Notes: An asterisk (*) denotes statistical significance at the 5% level. The sector descriptions are suppressed
to preserve the anonymity of cooperatives within each.
Agricultural Finance Review, Fall 2003 Richards and Manfredo 189

Table 8. 3SLS Model of Cooperative Joint-Venture Performance: ROA and Sales Growth
ROA Sales Growth
Variable Estimate t-Ratio Elasticity Estimate t-Ratio Elasticity

Constant 0.125* 6.818 !0.712* !8.095

Asset Turnover 0.010* 2.109 0.926 0.005 1.238 0.351
Current Ratio !0.005 !1.224 !0.199 0.067* 3.561 1.902
Debt-to-Assets Ratio !0.191* !13.286 !3.358 0.398* 5.739 5.061
GDP Growth 0.078 1.275 0.147 1.476* 5.308 2.008
Value of Output 0.000 1.575 0.421 !0.001* !2.184 !2.616
COGS-to-Assets Ratio !0.009 !1.836 !0.700 — —
Output Price — — 0.003* 5.050 7.269
Sales Growth 0.058* 9.471 0.080 — —
ROA — — 1.243* 9.602 0.902
Prob(Joint Venture) !0.070* !3.097 !0.114 0.615* 6.049 0.730
Sector 1 0.003 0.687 0.011 0.080* 3.864 0.207
Sector 2 0.024* 6.076 0.211 !0.034 !1.854 !0.218
Sector 3 0.026* 3.982 0.053 !0.149* !4.949 !0.218
Sector 5 !0.004 !1.052 !0.028 0.052* 3.001 0.244
2
R 0.282 0.316

Notes: An asterisk (*) denotes statistical significance at the 5% level. The sector descriptions are suppressed
to preserve the anonymity of cooperatives within each.

Similarly, acquisitions increase sales that combining operations will lead to

growth, but have no impact on
profitability. Often, cooperative mergers
and acquisitions are motivated out of an
attempt by a stronger cooperative to save
a weaker affiliate. Consequently, it is to
be expected that sales may rise, but
profitability will likely fall. In contrast,
strategic alliances tend to reduce
profitability and have no measurable
impact on sales growth, so
participation appears to be driven by
other non-economic organizational
objectives.
As a whole, these results are important
given the weight of the evidence cited
above which finds merger activity to have
a negative impact on financial
performance. In fact, the positive impact
of consolidation on sales growth may
indicate a greater focus on future
financial performance. On the other
hand, these results may indicate a
general failure of cooperative consolidation
activities to achieve their intended results.
If cooperatives are guide by the belief
greater market power, and thereby
higher margins, these results suggest
otherwise. Indeed, the literature on non-
cooperative mergers also supports the
finding that any benefits which may arise
likely are not due to improvements in
market power.
Several important implications follow from
these results.
# First, the motives for consolidation
among cooperatives differ greatly
compared to proprietary firms. While
issues of control are important for
publicly traded firms, cooperatives
appear to seek more capital.
# Second, successful transactions tend to
increase cooperative sales growth, but
not market power. Rather, because
consolidation provides scarce capital to
one party, any realized gains are due to
an enhanced ability to fund potentially
profitable investments.
190 Post-Merger Performance of Agricultural Cooperatives
# Third, sales growth tends to come at
the expense of profitability. Whether
cooperative managers take a longer-
term view of the potential benefits of
consolidation, or they tend to seek
market share and not bottom-line
performance, clearly there is at least
one positive financial outcome from
cooperative consolidation.
Summary and Conclusions
In recent years, agricultural cooperatives
experienced a rapid rise in the number
of mergers, acquisitions, and other
consolidation and restructuring
transactions similar to the trend seen
among proprietary, publicly traded firms.
Regardless of the motivation, the final
outcome of any of these activities is
expected a priori to provide positive
benefits which should eventually be
reflected through the value of the
companies’ stock or through measures
of financial performance.
While the capital asset pricing model
(CAPM) provides a generally accepted
benchmark for determining the post-
merger performance of publicly traded
firms, assessing post-merger performance
of agricultural cooperatives is not as
straightforward. Cooperative stock does
not trade on public exchanges, nor are
cooperatives required to disclose financial
statements and other information
commonly required of publicly held
corporations. Despite these complications,
given the vital role played by agricultural
cooperatives in the U.S. agricultural
sector, it is important to determine the
effects of consolidation on financial
performance.
The findings of this study indicate capital
constraints are the most significant factor
motivating cooperatives to partake in
mergers, acquisitions, joint ventures, and
strategic alliances. If a cooperative
merges with another, for example, it will
be better able to invest in productivity-
enhancing capital investments, develop
new products, or enter new markets, but it
may be burdened with a new division
which was not profitable before the
merger. While gaining access to more
capital by merging with another firm
may allow a cooperative to increase sales,
doing so may reduce profitability.
However, it may very well be the case
that lower profits are a temporary
phenomenon, because eliminating
redundant administrative units and
overlapping products and services takes
a considerable amount of time—
possibly more than the one-period lag
allowed here.
The implications of this research for
cooperative members, managers, and
policy makers are many. First, the
decision to consolidate should be viewed
from a long-term perspective and should
seek to maximize the present value of
members’ investments. Second,
cooperative managers as well as policy
makers may need to seek new and
innovative ways of assisting cooperatives
in acquiring external capital to finance
both daily operations and positive net-
present-value-generating projects without
necessarily resorting to consolidation.
With more opportunities for generating
outside capital, in particular equity capital,
consolidation may not be the least-cost
alternative to easing capital constraints.
Thus, government can help agricultural
cooperatives in a low-cost way by
advancing legislation or structuring
regulations designed to make equity
financing more attractive.
Finally, future research in this area
should address the more fundamental
problem experienced by cooperative
boards in negotiating mergers and
acquisitions, namely establishing a value
for a non-traded entity. If cooperative
mergers result from one cooperative
rescuing a weaker rival, as is commonly
the case, then there must be some way of
establishing an objective value of the
merged entity to assess whether
consolidation is indeed in the interests
of the larger firms’ members.
Agricultural Finance Review, Fall 2003
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