Over the past year we have lead sessions with CEOs and chairmen concerning mergers and growth. This caused me to read the article titled "Merger Clarity", by Myriam DiGiovanni in the November 7, 2007 edition, with great interest. The article presented credit union board leaders' ideas and solutions concerning how boards should view and position themselves for future merger opportunities.
To quote the article "The general consensus at the roundtable was that either there is a growth policy in place or you have to merge because you can't stay stagnant." In two of this year's sessions on mergers and growth we asked a few questions that received unsettling response rates (credit unions between $50 million and $2 billion). The first question was: How many of you have growth plans in place? About 50% said they did, but most of the plans were limited to strategic branching plans. The second question was: How many of you have been contacted by another credit union or third party with an offer to merge into a larger credit union? Over 85% raised their hands, even the large credit unions.
Now the questions and responses get very interesting. How many of you have guidelines in place concerning what to do with offers from other credit unions to merge into you or you to be merged into them? The response rate to this question was less than 5%. The following question was: Chairpersons, if you found out that your CEO had discussed or received a call or offer to merge and had not told you, how would you feel? The responses ranged between a reprimand noted in the board minutes to potential action for dismissal. Wow, these responses suggest that we as an industry and specifically each credit union CEO and chairperson need to accomplish some quick work to establishing guidelines for recognizing, analyzing and responding to merger offers.
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This concern is magnified by potential events and in fact lets put Wings Financial on it (could not help the reference). A credit union contacts the CEO of a smaller credit union and makes an offer to merge. As a benefit to the members they will give each $200 or $500 each or $.05 per dollar share. The CEO tells the courting credit union "no, we are not interested in mergers". Later a member finds out they could have made $1,000, gets an attorney to assemble a class action suit and sues the board. A terrible scenario, but possible. What if the CEO tells the board and they simply respond with a "no" without due diligence. Is the board's response backed by a realistic and actionable growth plan? What are the reasons this is not the best answer for the members, what is the rationale for saying no?
Many CEOs are receiving multiple letters from third parties who are fishing for merger activity. This is unfortunate as in some cases the inquiries are legitimate. But who should decide and what constitutes an offer in the eyes of the board and potentially the members?
For CEOs the issue of not having merger recognition and evaluation guidelines puts them in significant danger. At the personal level there is even more for a CEO to worry about. There were 25 CEOs in attendance at our last session on mergers and growth. We asked: How many of you have "change of control agreements" to protect your compensation in case of a merger and you lose your position? The response: zero hands were raised. We have witnessed a number of CEOs lose significant negotiating strength when the discussion of compensation is not addressed until a merger is in the making.
Merger activity is unlikely to decline over the next five years. It is in the interest of every board, CEO and the members to develop merger recognition, analysis and response guidelines and policies to protect them and ensure the best for their members. It is in every CEO's interest to get a change of control agreement in place as soon as possible. Merger activity will touch nearly every credit union over the next five years. It would be good to prepare now.
Paul Seibert
EHS-Design
VP Financial Services EHS-Design
Seattle
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