A Strategy for Farm Mergers
When I started encouraging farmers to consider merger and acquisition strategies with fellow operators a decade ago, it was more to enable them to grow in an industry marked by low and shrinking margins. Today, profits aren't the problem, but agriculture's aging farm population means seniors without a successor may need to align with others as they ease out of the business. Properly structured, a merger can help them avoid a huge tax bill at an equipment sale and stay as active in farming as their health and interest allows. In my mind, mergers can be even more relevant today.
Ed McMillan, an agribusiness consultant and mergers and acquisitions specialist, once told the Association of Agricultural Production Executives that due to increasing global competition, shrinking margins and emerging technologies, if commercial farmers and ranchers want to remain competitive, growth would be a necessity...not a luxury. In terms of management strategy he encouraged them to consider three options:
-- Lead. Be proactive in developing a future direction that's right for your business, e.g. increase productivity and output; increase value added of current products; expand the size of the current operation; or leverage skills and assets into a new operation.
-- Follow. Find someone who knows where to head and get on board, i.e. merge or align with another business.
-- Get Out of the Way. Find a buyer and decide where else to best invest your skills and capital.
While his comments won't resonate well with many producers, they were directed to a group of producers who are looking at the long term and who want to remain players as full-time operators.
The objective of this article is to address some of the issues that need to be considered by producers who might be thinking about a merger, either as the acquirer or the acquiree. Although the idea of a merger of equals tends to be the most appealing option, I have yet to see one that worked out that way.
If any merger is to be successful, the first question is would the new entity be greater than the sum of its original parts in terms of competitiveness and performance? This may result from economies of scale, management specialization, complementary talents or resources, or access to new input and output markets.
One caveat, just getting bigger does not necessarily produce economies of scale. Scale economies usually result from shifting to a new cost or revenue curve, or from moving to a lower point on the industry's long run cost curve.
Two comments I frequently hear are that too many farmers and ranchers run their businesses more as producers than as business managers, and that they are resistant to change. From my experience, most farmers don't see either statement being directly applicable to them personally. First, most believe they are managing their farm as a business. The question should really be do they possess the necessary management skills and attributes to compete with the best in the business? The real issue again is are they moving forward as fast as their leading edge competitors?
Let me use an analogy to make my point. Consider two people driving the same direction on an Interstate Highway. Both are clearly changing and both may even be headed in the same direction. However, one is traveling 55 mph and the other 70 mph. That means one is getting further ahead of the other by 15 miles every hour. Based on five, 8-hour days a week, at the end of one year he will be 31,200 miles ahead. That's a pretty big advantage.
But what if the 70-mph operator decided to ramp things up do business 24/7, through round-the-clock multiple 8-hour shifts, think of modern manufacturing plants or large dairy operations. If the 55 mph driver stayed on his current pace he would now be falling behind by 498,800 miles per year. Assuming a highway that circumvented the globe, he would be getting lapped about 20 times a year.
Is the example extreme? Yes. Is it unrealistic? No. One row-crop operator I know now farms in 15 states so he can diversify production and market risks, in addition to utilizing his labor, management and equipment 9 months a year rather than the normal single site planting and harvesting periods. A Florida specialty crop operator I recently met harvests 364 days a year (they don't work on Christmas Day) and plants a new crop every 3 days.
The second question may actually be harder to answer and that is an honest and objective assessment of you and your business, as well as your prospective business partner. Essentially, it involves doing a comprehensive S.W.O.T. analysis of each firm's strengths, weaknesses, opportunities and threats -- both internal and external. This means not just considering the historical and current situation, but also what risks and changes are on the horizon for the industry. This then needs to be followed up with a similar evaluation of what the answers would be for the merged entity. Synergy, compatibility, complementary and new opportunities are all key things to look for. Some poorly conceived mergers could actually compound both firm's problems.
Microsoft founder Bill Gates once said, "The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency."
It is critical to know what you need out of a merger, what you would gain and what you would be willing to give up. Part of the rationale behind any successful merger needs to be the ability to compensate for weaknesses and to capitalize on strengths. Some of the reasons not previously mentioned might include management succession, the ability to grow without taking on additional debt, the elimination of duplication, the ability to adapt new technology and the ability to more fully utilize existing resources.
Over the past few years, the farm press has profiled several farmers who have merged operating entities in order to capture greater economies of scale and as a way to achieve greater management specialization by pulling together a management team with complementary skills, i.e. where one business's strengths offset another's weaknesses and vice versa. Young farmers can acquire mentors and small and mid-size farmers can gain access to better technology and equipment, for example. They all benefit from having someone "watch their back" rather than farming solo.
While mergers can offer a great deal of economic potential, they also present their own set of risks. This is particularly true on the relationship side of the business. A merger is a business marriage and just like any other marriage, things don't always work out even when the business rationale appears to make sense. Most of the failures that occur are because they involve people with different backgrounds, personalities, egos, values, personal and business goals, and management/work styles. These are all things that need to be recognized, discussed and never underestimated in terms of their impact on the venture's potential. Due diligence shouldn't be limited to just doing the homework on the financial and legal matters.
Obviously, the merger or acquisition approach isn't and won't be a viable option for many farmers. In some cases they wouldn't bring anything to the table that another business wanted or needed other than their assets. Likewise many farmers who are used to running their own business would never be happy working for someone else. This is particularly true if the other business's management and operating style are significantly different than their own.
The structure of agriculture is going to continue to change and many aren't going to like what occurs. But I sincerely believe there are several ways to survive and succeed. However, almost all are going to involve a greater level of interdependence.