If the world is cold, make it your business to build fires, said Horace Traubel. Translation: If your industry is consolidating, make it your business to consolidate. At the moment you may think you have approximately 6,500 possible consolidation partners. However, now is the time to consider a cross-industry transaction and increase the number of your possible consolidation partners by approximately 7,000 to a whopping 13,500.
Cross-industry transactions offer a series of advantages and the timing for these couldn’t be better than now.
Cross-industry transactions, by their very nature, are largely business transactions and do not inhere the emotional issues often present in credit union-to-credit union transactions. Emotional issues such as naming, board seats and the like, render credit union-to-credit union transactions prone to stalls. Conversely, cross-industry transactions boil down to the numbers. Additionally, with proper mark to market accounting (typically involving an aggressive mark to the target loan portfolio) and valuations, a cross-industry transaction can be structured in a way that allows the transaction to contribute cash to the bottom line from day one, post closing. Compare this with the typical five-year profitability timeframe of a de novo branch and the advantage becomes clear. These transactions allow you to purchase existing branches and customers to provide an instant impact to your credit union.
Credit union-to-credit union transactions should be a part of your M&A strategy but should not be your only option. Not only do you limit your possible partners by half, but these transactions bring their own challenges. They are a key tool for growth but they are not perfect either. As mentioned above, they often come weighed down by emotional deal points. Additionally, credit union-to-credit union transactions often occur when the to-be-acquired credit union is troubled and has an impaired capital position. This in and of itself is not a deal breaker but just a negative factor in credit union mergers. Cross-industry transactions do bring a distinct set of advantages to the table and cannot be ignored.
Now is the time to pursue a cross-industry transaction for reasons both inside and outside of our industry. Inside our industry, the NCUA has clearly indicated its support and openness to these transactions and various state regulators have done the same. Outside our industry, a series of factors are driving these transactions. As we all experience, the current environment of low margins and increasing regulations makes it difficult to do business. The regulatory pressure on smaller banks, mutuals and thrifts is intense, as they are required to abide by the same regulations as large banks. The number of institutions under formal orders from their regulator is likely to increase, making it even more difficult to operate the institution; this leads to the institution to become tired. Additionally, the M&A market within the bank industry is limited. Currently, large banks and regional banks in general are not seeking to acquire smaller banks. The activity is limited to small bank to small bank deals, so the competition is sharply lower that it could be. Currently, your credit union is likely to be one of the only options for institutions you target. As is always true about timing, the current situation is fluid and can change at any time. Take advantage of it now.
Credit unions have a unique opportunity to offer banks a friendly alternative to the type of consolidation they are accustomed to. Based on our cooperative culture, our way of doing business, and friendly accounting rules, it is highly likely that a transaction with a credit union will not involve the closing of a branch, the termination of employees or a decrease in support for the local community. In fact the opposite typically occurs. Employees are retained, trained and given growth opportunities; branches remain open and a new and more expansive product mix is offered; and the local community gains a new champion and supporter. This has absolutely been proven to be the case based upon the cross-industry transactions completed to date.
Michael M. Bell is an attorney with Howard & Howard.
248-723-0493 or MB@h2law.com