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CROSSING the Merger Finish Line: Co-op consolidation takes time, effort and support from key groups, say these merger veterans.

Nearly 18 months into a merger with a neighboring Iowa cooperative, Milan Kucerak still hits the road once a month to meet with members. But he sleeps a whole lot easier now.

The pieces are falling into place, just as he, board members and staff so carefully planned during the long months before the merger officially took place April 2, 2016.

Kucerak is CEO of Landus Cooperative, formed through the merger of two longtime competitors, Farmers Cooperative Company (FC) and West Central Cooperative. Based in Ames, Iowa, the newly unified cooperative is now one of North America's largest grain storage companies. It offers diversified products and services for its 7,000 corn, soybean and livestock producer-members in Iowa and Minnesota.

"This was a merger of equals," says Kucerak. "It's gone surprisingly well."

The Landus Cooperative merger is one of 94 that occurred among U.S. cooperatives between 2013 and 2016, according to USDA agricultural economist James Wadsworth. Add in co-op acquisitions of another co-op, and the consolidation number rises to 104. At least a dozen more co-op mergers have taken place in 2017. It's a high rate of co-op consolidation not seen since the late 1990s and early 2000s, says Chuck Conner, president and CEO of the National Council of Farmer Cooperatives.

The reasons for the co-op mergers remain strikingly similar to years past. Member-owned organizations are still seeking greater market presence and increased economies of scale. They need more capital to compete and to acquire assets and sophisticated technology to better serve their members. Mergers also can capture synergies between two organizations that create greater opportunities locally and globally.

"The agricultural industry is in a period of major change," says David Thorbahn, CEO of Select Sires, which merged with Accelerated Genetics in July 2017. "New technology, pressure on margins and scale of economies are all part of the push toward consolidation."

But translating the vision of a merger into successful reality takes work. Few understand this better than Kucerak.

How Landus Cooperative did it

Kucerak had been through smaller mergers before, but none the size of one that created Landus Cooperative. Moreover, he knew a handful of co-op mergers in nearby areas had failed around the same time the Landus Cooperative merger was unfolding.

"People wondered if our merger would fly," he remembers.

Kucerak, who had been CEO at West Central for only a few months, believed a merger would streamline overlaps in operations and geographical assets between West Central and FC. He also saw opportunities, such as strengthened rail transportation capability, that could be achieved from the strengths of both producer-owned businesses.

"It made sense for us to talk," he remembers.

So Kucerak, board members from both co-ops and key staff set out to chart a successful course for a merger. The first step was a confidential meeting, arranged by an intermediary, between Kucerak and FC's CEO, Jim Chism, in early 2015. Soon, the two CEOs brought in their chief financial officers and other senior staff. In late spring 2015, board discussions began. All agreed the merger was worthwhile.

"Our goal was not to be bigger but better," Kucerak says. "Rather than compete, we realized we could combine and use our capital for growth and services to our membership."

Working with an outside consultant, leaders of the two co-ops studied merger pros and cons. In August 2015, they announced a letter of intent to merge. Staff helped conduct due diligence. In October, the two boards approved putting the proposed merger before their memberships for a vote.

Employees were kept informed along the way. "We knew that if employees didn't think the merger was good, it wouldn't fly," says Kucerak.

Through November and December 2015, the two co-ops engaged in a campaign to make members aware of merger details and the importance of voting. They called all members to remind them their vote was vital and to answer any questions. Kucerak, the two co-ops' board chairmen and other leaders participated in road shows across member areas to explain the proposed merger. Kucerak even gave out his cell phone number so producers could call him personally.

"We did not consider the merger a slam dunk," Kucerak says. "There was a fair amount of dissension. There were concerns that the merger would mean less competition for producers. People were worried the new co-op would be too big or wouldn't be able to take care of all members or keep in touch with them."

Board members agreed that the new board would remain relatively large. West Central would keep its nine directors. FC would reduce its 11 board members to nine. In addition, all members of both co-ops would maintain their dollar-for-dollar equity in the proposed merger.

In December 2015, members of both co-ops voted to approve the merger. Members of West Central voted 69 percent, and FC members 71 percent, in favor of the merger.

But the work was hardly over. Through the following months, the process began of integrating the two former co-ops, putting the right people into the right roles and building the new Landus Cooperative name and logo.

In all, it took a year from the first merger talks to the official unification. Changes are still occurring. "Initially, we did not lay off any employees," Kucerak says. "In rural America, we have trouble finding good help. But since then, we've closed a few facilities. In June 2017, more than a year after integration, we had a 5-percent reduction in staff. We've also moved people around to ensure we have the right people in the right roles.

"When you bring two companies together, the biggest challenge is culture," he adds. "We've really focused on that. We've provided training for our employees. We share the co-op's financials with them every month so they understand what's going on."

Today, Landus Cooperative's 18-member board continues open discussions about strategy, capital expenditures and managing the co-op.

"It's been a really good start," Kucerak says. "People are now thinking in terms of Landus Cooperative, not the old co-ops. This is not your grandfather's co-op. We strive for global reach and local touch. We are moving forward."

A smooth merger

Another cooperative manager who recently crossed the merger finish line is Rod Hebrink. He is president and CEO of Compeer Financial, which officially launched operations in July 2017 after a year-long merger process involving three Farm Credit Associations: Illinois-based 1st Farm Credit Services, Minnesota's AgStar Financial Services and Wisconsin's Badgerland Financial.

"The merger has gone very smoothly," Hebrink says. "It's worked as it was supposed to work. We haven't closed any offices, there has been relatively little impact to employees, and it's delivering equal or better service for stockholders."

Based in Sun Prairie, Wis., Compeer Financial counts nearly 45,000 member-owners, 17 board members, 1,200 employees and more than $19 billion in assets. Its loan portfolio consists of grain, dairy and swine producers, as well as rural homeowners.

Like Kucerak, Hebrink emphasizes that the Compeer Financial merger was one of equals. In fact, the Compeer name comes from an English word meaning equal in rank, ability or accomplishment. And that focus drove the merger.

While there was little opposition to the Compeer Financial merger, Hebrink says there were the typical concerns: Would it result in less competition for producers? Would the new and larger organization lose that connection to an individual office or community? Would customers feel less important? Would employees lose their positions or jobs?

For starters, none of the three Farm Credit associations had been competitors, points out Hebrink. Secondly, each association had been a product of previous successful mergers. "We could point to past successes and ask, 'Why would this be any different?'" he remembers.

Additionally, the Compeer Financial merger had the unanimous support of all three boards, which "sent stockholders a strong and important message," says Hebrink.

Compeer Financial had to adhere to strict Farm Credit System conditions to merge. But Hebrink believes something else is essential for a successful merger. "Transparency with stockholders and employees is critical," he says.

When a merger vote fails

But good intentions, board support and careful planning don't always result in a member-approved merger. Among those who have seen a proposed merger fail is Hal Clemensen, chairman of the board of South Dakota Wheat Growers Association (SDWG). In 2015, the 5,200-member grain-handling and agronomy services co-op sought a merger with neighboring North Central Farmers Elevator (NCFE).

For more than a year, both boards and management teams worked to craft the blueprint for a merger that would streamline duplications of products and services, increase efficiencies and make better use of their combined capital and assets. They even developed a name for the new organization, CentraGro.

The two co-ops have operated across the Dakotas since the 1920s. Both are sizeable businesses. SDWG annually markets 180 million bushels of grain, generates $1.4 billion in sales and operates 40 locations, with headquarters in Aberdeen. NCFE is a full-service cooperative based in nearby Ipswich. Its 22 locations serve over 2,500 producer-members.

Both boards were unanimous in their support for the merger. But the membership vote failed.

"We fell short by 26 votes," says Clemensen, SDWG chairman since 2005. "It was real disappointing to me --but, in some ways, not surprising. Our two co-ops had competed head to head for 90 years. A lot of emotions came into play."

At SDWG, 61 percent of the votes cast approved the merger. At NCFE, however, 51 percent of the members voted against it. Clemensen cites two reasons for the voting outcome.

"A lot of people just assumed the merger would pass, and they didn't take the time to vote," Clemensen remembers. "They thought they would let their neighbor make that decision."

The other reason, he says, is that some employees were against the merger. "When an employee shrugs and shakes his head when members ask about the merger, that's not good," he adds. "We didn't do a good enough job in getting employees' fears taken care of."

The vote's failure struck Clemensen hard. "This is the members' co-op," he says. "As a board, we've tried to make decisions for them and keep them informed. But there's a real lack of ownership these days. Our grandfathers fought to get co-ops formed. Now the attitude is, 'Whatever happens, happens.'"

He recalls how the merger process got "personal and nasty, and friendships were lost."

After the vote, leaders of the two coops vowed not to revisit the merger idea unless members requested it. By the summer of 2017, merger talk had resurfaced among the memberships, spurred by the downturn in the ag economy and an area drought that further hurt profitability. In addition, another cooperative, Ag Processing Inc., is building a new soybean processing plant in Aberdeen.

"That will change the margin structure for SDWG and NCFE," says Clemensen, who grows corn and soybeans on 3,200 acres. "We're for that as producers, but it means our coops will have to get more efficient."

In July of this year, the two boards voted to revisit the merger idea. After two weeks of seeking member feedback, the boards voted Aug. 14 to proceed to a membership vote to unify the two coops. Following a series of informational meetings, ballots were mailed to all members in late August. Results will be known by late September. If the members approve it, the unification is expected to become effective Feb. 1, 2018. It would create the largest agricultural co-op in South Dakota.

This time around, member communication is a priority. "Maybe we came out too fast before," Clemensen says. "This time we'll do a better job of listening and explaining to members and employees."

Ultimately, there are lessons to be learned from both successful and failed mergers, experiences that are likely to be closely watched as the consolidation trend continues among cooperatives.

"As two co-ops, we've cut expenses as much as we can," Clemensen says. "As one co-op, we could be so much more efficient. But the ultimate decision must be made by the members, not the board or management, to determine the fate of the company."

Catherine Merlo

Editor's note: Merlo is a California-based writer/editor with extensive experience writing for, and about, cooperatives.

Select Sires-Accelerated Genetics merger: A closer look

David Thorbahn spent more than a year of his life focused on a cooperative merger.

"A merger is exceptionally stressful and a lot of hard work," he says. "It brings sleepless nights and personal sacrifice and puts tremendous stress on the teams involved. But the benefits for our member-owners are clear."

Thorbahn is CEO of Select Sires, which merged July 1 with another cooperative, Accelerated Genetics.

"By working together, we will be stronger," says Thorbahn.

The merger idea was born in 2016 between board chairmen Dan Andreas of Select Sires and Scott Dahlk of Accelerated Genetics. Although they were competitors in the livestock genetics market, the two co-ops already shared a collaborative business relationship that began in 2001 when the two became joint owners of World Wide Sires, the international marketing arm for both organizations.

Andreas and Dahlk believed an even closer association could bring more robust and broader-based product offerings, greater and more comprehensive services, and a better overall cost structure. United on the benefits, they brought in the management of each co-op.

Six months of due diligence followed. Outside attorneys for both organizations also assisted. They did several feasibility analyses to make sure the resulting merger would be profitable.

"We had to move quickly to keep things confidential because leaks can open the doors of opportunity for competitors to be divisive," Thorbahn remembers.

Management teams representing key operations of both co-ops pulled together to plan how the newly merged co-op would operate. "That's where the merger work happened," Thorbahn says. "The professionalism shown by those teams allowed us to build execution plans and go forward with a strategy that's worked very well."

At a special delegate meeting on June 22, Accelerated Genetics delegates voted in favor of uniting the two co-ops, formally finalizing the agreement recommended by both boards of directors.

The newly integrated federated co-op, whose production facilities are based in Plain City, Ohio, keeps the Select Sires name. It counts 33,000-plus members. Through the merger, Select Sires manages the Accelerated Genetics' brand and assets, including bull-housing barns, product development labs and equipment, land, buildings and production facilities, many located in Westby, Wis.

The merger wasn't a first for either co-op, both of which had undergone consolidations before. From those, Thorbahn has learned what's most important in a merger.

"Too often, the co-op's strategic investigation is too much about the co-op name or the board or employees," he says. "But it really needs to be about the value a coop provides to its members."

Caption: "A merger is exceptionally stressful and a lot of hard work," says David Thorbahn, CEO of Select Sires. "But the benefits for our member-owners are clear." Photo courtesy Select Sires

Before, during and after: Advice on a co-op merger

* Look for a merger partner whose business type, market approach or culture is similar to your co-op's.

This increases the chance of a successful merger.

* Don't promise what you can't deliver. If you don't know or haven't decided about key operations, assets or personnel, be honest in telling members, employees or customers, recommends David Holm of the Iowa Institute for Cooperatives. He has advised on nearly 50 co-op mergers since 1994.

* Continually reinforce the need for change. "Don't underestimate the ability of your good members to understand and adapt to change," Holm says.

* Be aware of board egos. "One of the thorniest issues is getting the boards of both co-ops to create an environment for open, frank discussions about the strengths and weaknesses of both organizations," says agricultural economist Allen W. Gray of Purdue University. "That's a big challenge because board members often come in with ego and want their own co-op to be the winner. A merger has got to be for the benefit of the members. You can't make it a competition."

* Expect surprises. Due diligence may reveal that an asset is in poorer condition than you thought. Two coops are likely to have different Information Technology systems and software.

* Determine who the new CEO will be even before the merger vote. There will be two CEOs when talks begin and one when the merger is done. Who that will be should be clear as soon as possible. Also, know what the transition path will be for the CEO who won't be heading the new co-op.

* Encourage every member to vote on the merger. Remind them their voice--and every vote--counts.

* Have open, frank and frequent communications with employees. "Merger changes can be disturbing to employees," Gray says. "The new organization needs a hyper-focus on maintaining talent and helping the new culture take hold."

* Make changes quickly. "If new branding or a name change is needed, or assets or store locations must be shut down, do it right away," says Gray. "Don't let there be a slow, painful death. Focus on the future."

If you must cut staff, do that immediately too, adds Holm. It's unfair to let employees hang in limbo. "They usually suspect the worst if you don't tell them, and some will contaminate the attitude of other employees," he says. "Cut deep and then rehire if necessary. Don't be afraid to make a clean break with some employees, including 'sacred cows' from the old companies."

* Don't underestimate the importance of culture. "Culture can't be seen on a balance sheet, but it's a huge part of a merger's success," says Holm.

Caption: South Dakota Wheat Growers (SDWG) Board President Hal Clemensen presents information during a meeting attended by members of Wheat Growers and North Central Farmers Elevator in August to discuss the benefits of potential unification. An initial attempt at merger failed to gain the needed votes, but a second attempt is underway. Photo courtesy SDWG

Co-op conference & festival coming to DC area

The Co-op Impact Conference, Oct. 2-4 in Alexandria, Va., has been designed as a premier networking and learning event for co-op members, practitioners and advocates, as well as an opportunity to advance the shared interests of the cooperative movement. It will bring together a broad spectrum of cooperative sectors to build on and amplify the economic impact co-ops have in the United States and internationally.

The event, being conducted by NCBA CLUSA at the Hilton-Old Town Hotel, replaces the sector-specific conferences it has traditionally hosted. At its core, this conference will examine how co-ops can answer some of society's most important questions around ownership and opportunity.

NCBA is also hosting the inaugural Coop Festival Sept. 30-Oct. 1 on the National Mall in Washington, D.C., as a public awareness event to help launch Cooperative Month in October. It will feature live music, speakers, games and an interactive booth. For more information about both events, visit: www.ncba.coop.

Key Co-op Month messages

Here are some key messages to relate in interviews and press releases that have been found to resonate with the media and the public. They help achieve the goals of Co-op Month, which are to raise public awareness of cooperatives and celebrate their accomplishments.

* There are more than 40,000 cooperative businesses in the United States with 350 million members (many people belong to more than one co-op). These cooperatives generate $514 billion in revenue and more than $25 billion in wages, according to a study conducted by the University of Wisconsin Center for Cooperatives, with support from USDA Rural Development

(http://reic.uwcc.wisc.edu/default.htm).

* Cooperatives represent a strong business model and greatly contribute to both the national and local economies.

* Studies show that consumers want to do business with companies that share their values, making today's environment ideal for cooperatives and their commitment to the communities in which their members live and work.

* Co-ops don't have to answer to outside shareholders; they care about meeting their members' needs.

* Co-ops represent democracy in action, with control exercised by a board of directors elected from the ranks of members; the board hires and directs management and is ultimately responsible to the members;

* Cooperatives generate jobs in their communities, keep profits local and pay local taxes to help support community services. Cooperatives often take part in community improvement programs, ensuring that everyone has an opportunity to benefit from the cooperative experience.

To better "bring home" these messages, gather additional data about the role and power of co-ops in your state, region or community.

Caption: A wide variety of graphics that can be used for print, internet and social media (examples above and on the facing page), as well as sample press releases and Coop Month proclamations, event ideas, etc., can be downloaded at: www.coopmonth.coop.

Caption: Landus Cooperative trucks roll late into the night hauling in the soybean harvest. The company was formed in 2016 through the merger of two longtime competitors, Farmers Cooperative Co. and West Central Cooperative. Photos courtesy Landus Cooperative

Caption: Facing page, lower: "People wondered if our merger would fly," says Milan Kucerak, CEO of Landus Cooperative. Today, the diversified grain and supply co-op offers products and services for 7,000 members in Iowa and Minnesota.

Caption: Mary Elvekrog (left), Compeer Financials senior dairy specialist, walks through a freestall barn with client Robert Baerwolf. Dairy lending is an important part of the banks portfolio. Photo courtesy Compeer Financial
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Author:Merlo, Catherine
Publication:Rural Cooperatives
Geographic Code:1U4IA
Date:Sep 1, 2017
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