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Answer:
Cooperatives differ in their approach to mergers. In some cooperatives, the directors maintain a
discouraging tone toward mergers, but would probably consider a merger if it were presented to
them. In other organizations, the board may take a proactive role in aggressively pursuing a
merger or acquisition opportunity. Decisions involving mergers and reorganization fall under the
general category of strategic planning. Strategic planning involves answering questions such as:
• What is the purpose of our organization?
• Who do we serve?
• What are our strengths, weaknesses, opportunities, and threats?
• Where do we need to take this company?
• How do we plan to get there?
Viewing mergers and acquisitions within the context of strategic planning facilitates a proactive
rather than a reactive approach. It may also help the cooperative avoid tying up too much time,
energy, and effort in pursuing mergers at the expense of operations and other types of
opportunities.
The evaluation and negotiation of a merger are a major business decision. Your attorney, auditor,
and banker are important sources of expertise and assistance. Other outside resources include
business consultants, regional cooperatives, and university experts. Each merger situation is
different, but most successful mergers involve the same basic steps:
All in all, a merger is, in itself, neither good nor bad. A cooperative should view a potential
merger in terms of its overall mission to meet members’ needs. The success of a merger depends
upon planning, careful study, and management. Attitudes toward mergers change as the business
environment changes.
Cooperatives which rejected a merger have later become involved in successful mergers. Other
cooperatives which have merged have later split operations. However, according to a study by
the Agricultural Cooperative Service, approximately 80 percent of cooperative mergers are
classified as successful. The successful mergers tend to make a cooperative a more potent,
competitive factor or halt the decline of one or more organizations or provide the organization
with a base for future growth.
2. Write short notes:
a. Spin Off
Answer:
The creation of an independent company through the sale or distribution of new shares of an
existing business/division of a parent company. A spin off is a type of divestiture.
Businesses wishing to 'streamline' their operations often sell less productive or unrelated
subsidiary businesses as spin offs. The spun-off companies are expected to be worth more as
independent entities than as parts of a larger business.
b. Divestitures
Answer:
For a business, divestiture is the removal of assets from the books. Businesses divest by the
selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on.
In personal finance, investors selling shares of a business can be said to be divesting their
interests in the company being sold.
3. Discuss Master Limited Partnerships
MLP stands for Master Limited Partnership. MLPs are like REITs in the way they are structured
for tax purposes. They pay no income tax, and instead pay out their income to their shareholders
as dividends. To qualify as MLPs, they must generate 90% of their income from activities
relating to real estate, natural resources (timber, mining, energy), or commodities. MLPs trade on
the stock exchange just like shares of any other stock. One of the most popular MLP groups is
pipelines. Below we list the leading MLP investments.
How It Works/Example:
MLPs allow for pass-through income, meaning that they are not subject to corporate income
taxes. Instead, owners of an MLP are personally responsible for paying taxes on their
individual portions of the MLP's income, gains, losses, and deductions. This eliminates the
"double taxation" generally applied to corporations (whereby the corporation pays taxes on its
income and the corporation's shareholders also pay taxes on the corporation's dividends).
MLPs make distributions that are similar to dividends, and these are generally paid out on a
quarterly basis. It is important to note that cash distributions are not guaranteed, and every unit
holder is responsible for the taxes on his or her proportionate share of income, even if the MLP
does not pay a cash distribution.
Generally, investors can purchase MLP units from brokers. A unit holder’s initial tax basis in
MLP units is generally the amount he or she pays for the units. The unit holder’s basis is
usually then decreased with each distribution and allocation for losses or deductions, and the
basis is increased for each allocation of income. A portion of certain distributions may qualify
as a return of the investor's capital, thereby reducing the unit holder’s taxable basis.
When an MLP pays more in distributions than it earns in taxable income, the unit holder’s tax
basis is decreased by the difference between the cash received and the MLP's taxable income.
When the unit holder sells his or her units, any gain on the sale is taxed at the unit holder’s
ordinary income tax rate.
MLPs must mail an IRS Schedule K-1 to each of their unit holders every year. This Schedule
K-1 reports the unit holder’s allocated income, gain, loss, deduction, and credits. If the unit
holder’s taxable partnership income for the year is negative, then this is considered a passive
loss under the tax code and may not be used to offset income from other sources. Instead, the
passive loss may only be used to offset future income from the same MLP.
Although unit holders are generally limited in their liability, similar to a corporation's
shareholders, creditors typically have the right to seek the return of distributions made to unit
holders if the liability in question arose before the distribution was paid. This liability stays
attached to the unit holder even after he or she sells the units.
Why It Matters:
The fact that master limited partnerships are not subject to income tax means that more cash is
available for distributions than would be available had the company incorporated. This
generally makes MLP units worth more than similar shares of a corporation.
The size of an MLP's cash distributions generally drives the value of its MLP units. With this
in mind, it is particularly important for investors to carefully evaluate whether an MLP is able
to meet its current distribution obligations and whether it will be able to continue (and possibly
even rise) its future distributions. If a particular MLP sports a distributable cash flow coverage
ratio of 1:1, then this generally indicates that the MLP has adequate cash to meet its cash
distribution requirements.
As a side note, the American Jobs Creation Act of 2004 added MLP income to the list of
acceptable sources of income for mutual funds, with some conditions, including that mutual
funds may not invest more than 25% of their assets in MLPs, nor may they own more than
10% of any one MLP.