How will your credit union grow and compete amid the looming onslaught of merger and acquisition (M&A) activity on the horizon? As the number of larger asset-sized credit unions pursuing mergers escalates, ultimately leading to larger transactions, it’s critical for leaders to understand recent trends and strategic structures that exponentially expand stakeholder value while preserving the best of institutional legacies.
A Quick Recap of What’s Happening Now
In addition to larger merger transactions, we’re also seeing more mergers of distance. This could be anywhere from a short drive, contiguous states or even across the United States. COVID allowed us to see that a hybrid approach is possible, providing credit unions the opportunity to diversify and expand geographic membership while retaining employees in the areas they know well, ultimately enabling employees to continue to serve a combined membership effectively.
Instead of opening a new branch, more credit unions are considering merging with another similar minded credit union that already knows the new markets they are considering. Together, a combined organization has more purchasing power, geographic diversity, a stronger employee base, a larger capital base and the scale to deliver on the credit union industry’s mantra of people helping people.
There is also more of a focus in terms of the low-income designation. For credit unions approaching their 12.5% caps in commercial lending, merging with a credit union that has low-income designation can help them continue to grow and serve local small businesses while improving net interest margin.
Understand Key Structural Differences
Credit union to credit union mergers are very different than for-profit transactions. Often, the humanistic/emotional aspects of these transactions run high among key stakeholders. From questions about retaining original account numbers to the future of the credit union’s employees, members want to truly understand any personal and people aspects of the proposed change; your members will appreciate transparency!
Credit unions’ stakeholder-first (members, employees, communities) structure and philosophy naturally flow through to merger discussions. While it’s important to answer immediate questions such as staff keeping their jobs, leaders must also focus on what members want longer term. For example, will joining forces with a like-minded institution lead to more products and services, better digital tools, competitive rates and fees, more convenient distribution channels (both physical and technological), and better career paths for the existing team down the road?
While lower rates and fewer fees may have attracted members initially, the service and the people are often why members stay with a particular credit union. When all key stakeholders – members, communities and employees – stand to benefit from a transaction, it’s much more likely to be successful.
Define Your Merger Strategy
What is your credit union’s merger strategy? Even if pursuing mergers is not a focus currently, are you prepared to answer the inevitable calls that may come from other organizations looking for potential partners? Before you evaluate the value proposition of a potential opportunity, you should define your credit union’s strategic negotiating profile. What would you consider your credit union’s non-negotiables? Many credit unions want to be the surviving institution in any transaction, but what does that mean in practical terms? Legally, it refers to which charter remains. However, perception is often reality. For example, if retaining employees and existing branch locations while adding new products, services, distribution channels and enhanced technology is really the focus, then the charter may not end up being non-negotiable. As we work with organizations across the country, we often find that clients are open to various structures and charter types – as long as they do not restrict their ability to serve current members and grow their new membership. Having an open dialogue regarding whether the charter matters is a great place to start.
Explore New Ways to Retain Legacy
Just like keeping a charter is not necessarily always a non-negotiable, the views of keeping a name are also evolving. For example, if XYZ credit union is going to change their name to ABC credit union but doesn't want to lose its brand entirely, there may be an opportunity to create a new XYZ Foundation, or retain the identity in a multitude of other ways such as a combined brand, a “legacy wall” at certain branches and branch names that retain historical perspective to name only a few. We’re actually seeing examples like this resonate really well with members as it shows that the combined organization is retaining its legacy and continuing to give back to its community with a dedicated pool of funds.
Ask Hard Questions Early
Rushing to sign a letter of intent with a plan to “figure out” all the details during due diligence can be a dangerous proposition. Rather than kicking the can down the road, ask the tough questions early, such as who the remaining CEO will be, the board structure (in terms of numbers), the executive board and so forth, at the beginning of the process to ensure there aren’t any deal killers lurking in the background. Even if these difficult discussions ultimately lead to not pursuing the transaction, it’s better to know that sooner to avoid months of wasted time, effort and money on both sides. You can also remain friendly in the market and even explore other, simpler collaborations such as participation loans.
Get Both Boards on Board
Often, this can be the most difficult hurdle in a merger between credit unions. Getting both boards in a room together, after both CEOs vet the opportunity and decide it makes sense to take the next step, can quickly help two different organizations realize that they are actually quite similar. After all, they ultimately want to do what’s right for their membership; that's why they're there.
Board interactions, in addition to those of CEOs and other key stakeholders, can also help evaluate culture, which is something that can’t be quantified clearly. Understanding how the culture, vision and risk profile of the organizations align is a critical step in evaluating a potential merger opportunity.
Overall, today’s merger landscape is quite different than it was 10 years – or even two years ago. Instead of viewing mergers as reactionary transactions, or even a sign of failure, many industry leaders are now seeing M&A as a strategic focus area to drive long-term, sustainable growth and create even more member value by partnering with another like-minded credit union as opposed to competing with them.
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