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Does Critical Mass Mean Higher Payouts?

MEDIA RELEASE
By Farmers for a Better Dairy Deal

6 June 2001

Does Critical Mass Mean Higher Payouts?

Farmers for a Better Dairy Deal have debunked the claim that Global Co is needed to attain the size or critical mass required to deliver good returns to dairy farmers.

Spokesman Mark Masters asks, “if size or critical mass is so important, how come the smallest dairy company in New Zealand (Tatua) has the highest payout to farmers?”

“If merging companies to form ever bigger conglomerates is the recipe for success, how can we explain the demise of companies like Fletcher Challenge?”

“Stories about failed mergers abound worldwide. Large scale mergers are very risky and frequently fail to deliver the promised benefits. Even worse, many actually destroy significant shareholder value”.

As Harvard University’s very highly regarded ‘Harvard Business Review’ recently noted: “There are better, more profitable strategies for dealing with globalisation than relentless expansion………[merger] deals that do not offer particular advantages…may drastically reduce value….Management appears to suffer from motivational biases toward mega-mergers, which can lead to irrational decision-making and large scale destruction of value”.

The worry here is that our dairy directors are making the same irrational decisions. As Harvard’s Business Review says, they risk behaving like a herd, blindly “following the leader”.

But Global Co will never keep up with the world leaders. Why? Because, as a closed co-op, it can’t access new capital. It can’t grow.

“Cementing three bricks together doesn’t make the three bricks any bigger”, said Mr Masters.

“One plus one plus one still equals three. Joining the Dairy Board together with its two co-op owners doesn’t make the total cake any bigger. The merger doesn’t increase critical mass.”

“In fact, we’re probably putting a noose around ourselves – Global Co will be starved of new capital and competing ideas. Intelligent growth will be much harder to achieve”.

Mark Masters acknowledged it would be wrong to say size doesn’t matter at all.

“A really big company obviously has larger resources to develop new opportunities and support new brands. But size is only one factor.”

“The fact is, it’s irrelevant if you haven’t got good ideas and good management”.

“We need better ideas and smarter management. GDC promises neither. It doesn’t even gain critical mass”.

Inquiries:
Malcolm Bailey
Tel (06) 323 8147

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