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Page 104 of 131 in the market is maintained. The requirement is expected to last for 5 years after which a new competitor is expected to gain foothold, thus the effect is sustained in the scenario to include changed market conditions. Assuming an average weight of a pig of 75 kg and an underlying margin per kg at 1.25 DKK per kg, this would yield a negative effect on the margins of 25 mDKK in 2015 increasing to 32 mDKK by 2020. The effect of selling 5,000 pigs weekly is ultimately found to result in a present value of synergies of -134 mDKK, ultimately making the business case negative.

The final Scenario 6 is included based on the same reasoning as scenario 5, however estimat-ing a total weekly delivery of 10,000 pigs, givestimat-ing a total of 520,000 pigs annually along-side the sale of the Thisted plant. This scenario is less likely and has been granted a lower weight.

The scenario has present value of synergies of -707 mDKK.

The fourth area of research and the underlying scenario analysis not only shows that the esti-mated value created is very sensitive to changes in the underlying assumptions, but also that the positive business case rely heavily on the requirements put forth by the Competition Au-thorities. The present value of the synergies result in 227 mDKK when applying a probability weighted average of the outcome, which is 48% lower than the base case scenario.

Page 105 of 131 Furthermore, failed integration of the companies’ cultures could potentially result in an un-successful merger in which cooperative members opt out or the most skilled employees leave.

Danish Crown and Tican has been in fierce competition for years, with Tican taking a chal-lenger position in the market. This may cause remnants of dispute during the merger. Moreo-ver, Danish Crown has continuously merged or acquired other slaughterhouses, often moti-vated by productivity or earnings differences and cooperative members of the target compa-nies pushing for supplementary payments at market levels, causing mergers to take place de-spite the slaughterhouses fighting for independence (Finans.dk, 2015). The proposed merger with Tican can be seen as a continuation of this trend, with Tican having been looking for an investor since 2011 (Bang, 2014) This ultimately culminated in the financial year of 2013/14, where earnings was not sufficient to pay the cooperative members a competitive supplemen-tary payment without drawing on equity reserves. While the merger with Danish Crown cre-ates value for Tican, to some extent it is also realization of what employees in Tican has been fighting against for years. The attitude towards Danish Crown might not change instantly, which could potentially create cultural issues or agency problems.

The attractiveness of the business case relies heavily on a successful integration of the coop-erative members in Tican, as members opting out would impose a direct effect in the top-line growth potential. One of the main motivations for Danish Crown to engage in the merger with Tican was argued an increased inflow of raw materials, and thus the risk of cooperative mem-bers not joining Danish Crown may harm the outcome of the business case. Given that Ti-can’s cooperative members are subject to a two-year equalization period with decreased sup-plementary payments it may very well be expected that some members will seek new hori-zons. However, the effect is limited to the extent that only a very small amount of slaughter-houses, besides Tican and Danish Crown, exist in Denmark who could facilitate an increased inflow of pigs. Communication is nonetheless important during the merger to avoid conflicts of interest, which could potentially arise if members found the levelling-out period to be un-just or if they do not fully understand the implications of the establishment.

Furthermore, agency problems may arise in the agricultural merger as outlined in section 4.4.

The issues include the Horizon Problem, the Portfolio Problem and the Free Rider Problem (Cook, 1995). The internal free rider problem in the proposed merger of Danish Crown and Tican is ambiguous. On the one hand, the cooperative members in Tican have reduced rela-tive dividends compared to Danish Crown during the equalization period. On the other hand the sale of Thisted plant result in the new members of Tican providing very few assets com-pared to the existing members of Danish Crown. The cooperative members of Tican get a

“free ride” on the total investments and efforts from existing members, thereby diluting the returns on existing members. Ultimately, the free rider problem may reduce the incentive for

Page 106 of 131 the cooperative members in Tican to provide capital since doing so would only have marginal effect on their return.

Another agricultural agency problem, the horizon problem, occurs when two sets of coopera-tive members have different attitudes on the balance between short and long term optimiza-tion. Tican’s members may be reluctant to invest in the consolidated entity for several rea-sons. First and foremost, money today may be more important than later due to the up-front penalty on the quoted price during the equalization out period. Secondly, they may not invest simply because they do not trust Danish Crown to make the best decisions with their invest-ments or they may simply see themselves as suppliers rather than owners (Cook, 1995).

Ultimately, based on the sensitivity and scenario analysis alongside the general risk assess-ment of the merger, the authors argue that the proposed merger between Danish Crown and Tican is subject to substantial risk despite base case estimate of 440mDKK and evidence by the lower expected present value of synergies of 227 mDKK. Managerial recommendations would emphasize the importance of aligning interests between the cooperative members’ in-terests as owners and suppliers. Furthermore, the underlying assumptions attributed to the marginal efficiency gains should be carefully conducted due to the high impact on the attrac-tiveness of the business case. The actual outcome of the business case relies on the demands of the Competition Authorities, where outcomes such as prohibited price effects and increased competition on the market were analysed. The authors acknowledge that the merger was ulti-mately not approved due to Danish Crown being unable to satisfy the Competition Authori-ties, or simply because the demands were too high for the merger to be attractive.

Should the Competition Authorities demand that the consolidated company would provide a competitor with a steady supply of raw materials for 5 years, the cooperative members of Ti-can would have an alternative competitor to sell their pigs for slaughter to, thus increasing the risk of members opting out of the merger agreement with Danish Crown. Additionally, anoth-er competitor in the market would decrease Danish Crown’s possibilities to exanoth-ercise market power, which the scenario analysis found would decrease the value creation of the merger significantly. The following section will determine whether members of Tican would benefit from staying with Danish Crown during the merger, or would benefit from opting out of the merger agreement.

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13 Impact on the cooperative members

A large body of literature and research exist on the subject of mergers in publicly-held com-panies but fewer studies have been found on mergers between cooperative societies. Measur-ing the impact on cooperative members from a merger is often more complex than measurMeasur-ing the impact on stockholders in publicly-held companies, as the cooperative members receive a combination of economic benefits from the cooperatives in which they function as both own-ers and suppliown-ers.