It's strategic planning season, and mergers are high on the listof sexy discussion topics for credit unions. However, credit unionsthat are drawn in by the twinkle and shine of a merger need tounderstand that the idea of a merger in terms of potentialvalue realized may not always match the reality when thedeal is done.

Credit union buyers, sellers and equals can look to these fivebest practice tips to realize the greatest value from a merger –from beginning to end.

Buyers

1. Define and prioritize how a merger fits into thecredit union's strategic priorities. A merger opportunityshould only be seized if it supports one of the credit union'sstrategic priorities. Buyers need to be clear about why they wantto merge. Is it to gain new capabilities (people, technology,etc.), financial flexibility through scale, new fields ofmembership or something else? Few opportunities “check off all theboxes.” Relying on a merger to achieve growth or efficiency puts alot of risk into a credit union's strategic plan, so it is criticalto prioritize how a merger fits into your strategic goals.

Defining and prioritizing the key reason(s) for a merger helpsclarify what the merger can bring to the membership and identifieshow a merger can provide alignment between the board andmanagement.

2. Prepare for the merger life cycle before embarking ona merger. Mergers are hard work. Credit union “buyers”need to be ready to allocate resources to perform diligence forintegration – from planning to execution. Does the credit unionhave the resources/skills to do a merger and executeagainst the business plan? Many credit unions can successfully asktheir teams to do an integration while performing their “day jobs”– but many can't. The merger's impact on the core strategic plan isan important discussion to have during the strategic planningprocess. In other words, what strategic initiative(s) will “give”if the credit union seizes a merger opportunity?

Sellers

3. Be ready with a response if approached for amerger. Boards and management should have a clear view ofhow they will respond if they are approached about a possiblecombination. Rather than an emotional “no,” a credit unionshould take the time to think about a scenario where it might makesense to not be the surviving credit union, includingmission-critical strategies, competitive position, and current andfuture member base. Two key questions the credit union should beprepared to answer are:

• Will a combination create value for the membership that thecredit union cannot create for itself?

• What would be the most important, non-negotiable areas for thecredit union and its membership?

4. Get clarity for staff as soon as possible.For the non-surviving credit union, one of the first questions toget answered is how staff will be handled. Oftentimes, staffreductions will be achieved through natural attrition. Possiblyeven more important is the question of what the combined managementteam looks like. Staff wants to know who they will report to and beworking with. Prolonged uncertainty creates staff retention risk,especially among top performers. This risk can impact the creditunion's ability to achieve the value from a merger, so clarity fromthe potential partners on this point is critical. Tough decisionsand conversations will surface, and they need to be addressed as apriority.

Merger of Equals

5. Agree on your risk appetite and success metrics for amerger of equals. Mergers of equals are generally aboutachieving financial flexibility through scale. Scale is not acompelling strategic reason for a merger in and of itself. It is ameans to an end – with the “end” being financial flexibility toinvest in things that may not have been possible before amerger.

If an MOE is successful and the credit union achieves scale andfinancial flexibility, the next critical strategic question is: Howdoes the credit union spend this newfound financial flexibility?Does it accelerate investments that it could not make before(channels, people, technology, new businesses, etc.) or does itbuild capital/earnings?

Now that it is double in size, the MOE board needs to agree onwhat capital levels it wants to maintain (i.e., its risk appetite).It also needs to agree on what performance levels are expected ofthe merged credit union. For example, what should the efficiencylevel be? Banks want it to go down and increase earnings. Creditunions need to decide between maintaining the efficiency ratio byincreasing/accelerating critical investments, or decreasing it tobuild capital – which likely means delaying some investmentsincluding headcount. Of course, it's likely a balance of the two,but defining that balance is a tougher decision for a credit uniongiven its non-profit mission.

Getting consensus on performance levels and risk appetite iscritical in the early stages of discussion. If the two creditunions can't agree on these areas ahead of time, it would be betterto part as friends than to have a misalignment that destroys membervalue.

Credit unions should take care not to get caught up in thespirit of “everyone else is doing it.” A merger clearly has a placein enhancing member value, but it is important to look before youleap to make sure the dream of member value is actuallyrealized.

Vincent Hui is Senior Directorfor Cornerstone Advisors. He can be reachedat 480-423-2030 or [email protected].