CUSO Consolidation Should Begin With Benefits
As the number of mergers permeating the credit union industry continues to rise, some CUSOs might be considering following that same path.
Because CUSO-only mergers are relatively rare, figures on the number of these types of deals are hard to track. More than 160 credit union mergers have occurred this year, according to the latest data from the NCUA.
John Dearing, managing director at the McClean, Va.-based Capstone Strategic, a growth consulting firm, said he has been involved in several CUSO merger and acquisition deals with since the mid-2000s. His experience has shown that having an approach from that examines the benefits of external growth is a good starting point.
“There’s a quote, ‘every company is for sale for the right equation,’” Dearing said during an Oct. 22 webinar on CUSO mergers and acquisitions conducted by the National Association of Credit Union Service Organizations. “I really believe that in my heart and soul. In the world of collaborative efforts, that’s not necessarily going to be the only thing that drives a deal.”
Before getting to that point, Dearing there are three phases of the acquisition roadmap: building the foundation, building the relationship and building the deal. The first phase involves pinpointing the vision and risks as well as assembling the team that will be involved in the potential merger or acquisition. In the next phase, prospects are researched and selected and negotiation platforms are implemented. By the final deal phase, a letter of intent and the deal structure are completed.
CUSOs should keep in mind three objectives as they consider a possible merger, Dearing said. First, generate new ideas when thinking about a credit union or CUSO’s strategic growth planning process and options. Second, share a thought-provoking perspective regarding proactive, growth through mergers and acquisitions; and third, provide tools for exploration and execution.
Certain CUSO services are primed for more growth including in the mobile space, and in the audit, security and analytics areas, Dearing noted. There’s also an increase in attention from entities that are looking to form partnerships in what he described as the traditionally sheltered credit union market.
“People are looking to (mergers and acquisitions) as a way to transform the organization and open up a basket of opportunities to thrive, survive and grow,” Dearing said. “They want to enter new geographic markets, add more services and team up with folks with unique technology to do things faster. M&As are just another tool in the tool box.”
But merging for the sake of merging can ultimately be a bad decision.
“Overwhelmingly, people will agree to something when they realize there is something in it for them,” said Denny Graham, president of FI Strategies LLC, a St. Louis-based strategic and planning firm. “They don’t care what’s in it for the credit union or the person who’s selling them this bill of goods; they care what’s in it for them.”
People buy financial services to make money through higher interest rates on deposits, save money from lower rates on their loans or lower fees, and improve convenience with more ATMs and better branch locations. Because of this, a potential merger has to address whether it can fulfill all of those need, Graham said.
In the case of a credit union merger, is it possible that a merger will be good for the credit union or the members, Graham said.
“Boards and management very clearly think about the efficiency ratios and capital ratios of the combined companies, or about the increased cost of the regulatory burden that is only getting worse. And they should,” Graham said. “Does the average member care or can determine how all of this will benefit them? Maybe there will be operating efficiencies. But back to point one. How do those help your members make money, save money, save time?”
CUSOs are formed for a number of reasons; among them, generating more loans to boost net income, said Guy Messick, general counsel for NACUSO. A credit union might also want to boost noninterest income through alternative financial services such as investments, insurance and trust services. These channels can pay fees to the CUSO or credit union. Reducing operating costs and increasing operational expertise are also reasons to form CUSOs.
Credit unions considering CUSOs often ask what the success indicators are, Messick said. One measure is integration. Successful CUSOs are able to integrate their products with the credit union products so that a member can access the products and information efficiently as possible, regardless of whether the member obtains the product at a credit union branch, phone center or web site, he noted.
Other CUSO success indicators include being well capitalized, having a good business plan, having the full support of the board and staff as well as a qualified CUSO management team, Messick said.
All of these factors could potentially come into play during the merger and acquisition exploration phase. Dearing said a big piece of the process is the vision.
“I challenge you to think about the process for base business and organic growth and how it can be replicate for external growth,” Dearing said. “Where are you and where are you going. This can be done over time. I’m a strong advocate in approaching this one step at a time.”