Cooperative Mergers and Acquisitions: The Role of Capital Constraints
Richards, Timothy J., Manfredo, Mark R., Journal of Agricultural and Resource Economics
Several explanations for merger activity exist for publicly traded firms, but none consider the unique aspects of cooperatives. This study develops a test for the hypothesis that cooperative consolidation occurs primarily in response to capital constraints associated with a lack of access to external equity capital. An empirical model estimates the shadow value of long-term investment capital within a multinomial logit model of transaction choice in a panel data set of the 100 largest U.S. cooperatives. The results substantially confirm the capital-constraint hypothesis. Thus, the primary implication is that internal growth may be a more viable alternative to consolidation if new forms of cooperative financing are developed.
Key words: capital structure, cooperative, discrete choice, joint ventures, mergers, multinomial logit, strategic alliances
A large number of studies address both the motivations for mergers, acquisitions, and other activities as well as their impact on firm value (Jensen and Ruback).1 While a unifying theory of the ultimate causes of mergers and acquisitions does not exist, most studies suggest that publicly traded firms engage in these activities to increase the value of the combined firm relative to the individual firms through economies of scale or through operational or financial synergies (Jensen and Ruback; Lewellen; Post; Scherer). Managerial hubris has also been suggested as a motivating factor, even if the intent of managers of acquiring firms is not malicious (Roll). Still other studies explain merger and acquisition activity as a consequence of more macroeconomic influences-following "merger waves" or as a response to industry shocks (Golbe and White; Linn and Zhu; Mitchell and Mulherin; Gort; Post). Today, long after the conglomerate merger wave of the 1960s (Hubbard and Palia), mergers and acquisitions continue at a rapid pace, particularly among agribusinesses.
While the bulk of this activity occurs among publicly traded firms, closely held companies, mutual insurance firms, and cooperatives are not immune. In fact, because these firms must often compete with publicly traded firms within their own industries, efficiency-driven consolidation typically spreads across organizational forms as a natural consequence of the process of creative destruction. However, non-publicly traded firms in industries without such competitive pressures have also experienced large numbers of mergers and acquisitions (see figure 1), so their cause remains an open question.
In particular, cooperatives present a unique problem because cooperatives are not formed to generate and retain profits, but rather to provide members with market access or other economic benefits that make their primary businesses more profitable. Because they lack an overt profit motive and cannot logically cede control to outside equity investors, most cooperatives do not issue publicly traded stock.2 Equity financing of cooperative organizations is facilitated through member contributions to the cooperative (Cobia) or through retained "patronage refunds." Without a clear mandate to maximize the value of the cooperative, therefore, it is not clear whether the factors observed to drive mergers and acquisitions among publicly traded firms are necessarily those that cause similar behavior among cooperatives.
Cooperatives' lack of access to equity markets and their mandate to return all profits to their owner-members, however, can create one unique motivating factor-namely, cooperatives tend to operate under conditions of severe capital constraint, typically relying on bank financing or bond issuance for the bulk of their capital needs. These conditions are similar to those experienced by publicly traded firms decades ago. In fact, Veblen (1924) first recognized that the merger wave of the 1890s was in large part facilitated by the development of new financial instruments which allowed acquiring firms to build a capital base greater than the value of their own assets. …