Financial profile of merging rural electric cooperatives in the year prior to consolidation: a study of coop merger activity over the time period 1948-1988.

• Author: Bacon, Frank W.

EXECUTIVE SUMMARY

There is an increasing amount of discussion and activity in the electric cooperative, rural public power and public utility industry regarding mergers and consolidations. These systems are pursuing merger and consolidation efforts as a means of improving competitive position through increased efficiency and cost savings. It is for these reasons that many industry officials from NRECA, CFC and state associations have also strongly supported mergers and consolidations.

The goal of improving competitive position through merger or consolidation may be accomplished through several motives, including:

1. To reduce debt.

2. To increase liquidity.

3. To increase asset utilization.

4. To increase profitability.

5. To increase managerial efficiency.

6. To engage economies of scale.

   The purpose of this study is to seek to discriminate merged cooperatives from non-merged cooperatives through an analysis of financial and operational profiles of statistically similar systems in the year prior to merger or consolidation. If it can be shown that financial and operational performance improved from before to after the merger, then strong support exists for increased cooperative mergers and consolidation is suggested.

   If mergers are motivated by the desire to improve efficiency and financial performance, then it follows that the performance of the non-merged cooperatives will be better than the merged cooperatives in the year prior to the merger. If the comparison shows the emerging cooperatives to be financially weaker than the matched sample of non-merged cooperatives, then it is reasonable to conclude that the underlying reason for the merger is to improve financial and operational performance.

   The composition of the merged group of cooperatives consists of the 50 cooperatives which entered into a merger between 1948 and 1988. A like number of non-merged cooperatives were selected. To reduce bias, the merged and non-merged systems were matched on the basis of location, size, consumer density, revenue composition and the chronological time period. Therefore, the cooperatives were almost identical in every respect, except that one entered into a merger and the other did not.

   The financial and operational performance was measured by several industry accepted rations which fell into one of five categories:

1. Profitability ratios

2. Efficiency or expense ratios

3. Debt usage ratios

4. Liquidity ratios

5. Activity ratios

   In general, the results of the study indicate that the merging cooperatives exhibited weaker profitability, efficiency, assets utilization and liquidity, along with increased debt usage compared to the non-merged cooperatives in the year prior to merger or consolidation. These results offer strong support for promoting merger or consolidation as a means of generating economies of scale and increased efficiencies and savings for cooperative members. Continued research needs to be performed to conclude whether increased efficiencies and financial performances are achieved as a result of the merger.

   Please read the following article by Dr. Bacon and Dr. Shin to gain a better understanding of the methodology and results, and of the direction of future research.

   INTRODUCTION

   Recently, the concept of merger has captured much attention at the local, statewide, and national rural electric cooperative levels. Many industry officials (from NRECA, CFC, and statewide organizations) strongly support mergers as a means of increasing efficiency in the industry. While the expectation of savings resulting from mergers appears likely, little "hard" evidence exists to support the claim. With few exceptions (Claggett, 1987; Bacon and Shin, 1988; and Macke and Hahn, 1989) most explanations of merger effects have been primarily descriptive and normative (opinions, prescriptions, or unsupported statements about...