7 minutes
In the last decade, approximately 2,500 U.S. credit union mergers took place and by the year 2020, it is projected that only 3,600 credit unions will exist in the United States. That’s a 40 percent potential decrease in surviving credit unions from 2015 to 2020. According to the article at http://tinyurl.com/canadianmergers, Canadian and Australian CUs experienced a similar loss between the mid 1990s and early 21st century, 35 percent and 47 percent, respectively.
While some banks have been deemed “too big to fail,” some CUs may find that they are “too small to succeed.”
Mergers are at the forefront of business continuance and survival in today’s economy, especially in the financial services environment. This is a consequence of today’s extremely competitive financial industry and expanding government oversight, regulations, and compliance (including expansion of current expected credit loss, which I wrote about in May of 2015). Accordingly, mergers offer a viable solution to CUs in terms of growth, sustainability, staying relevant and providing enhanced value to members.
Beginning with the exploration and assessment of the CU’s perspectives, the strategic merger analysis process focuses on the opportunities, challenges and value proposition concepts of collaboration with potential partners. The overall goal in any merger analysis is to determine a valuable merger strategy to benefit all CU stakeholders and determine how to overcome the hurdles along the way—ultimately positioning the combined entity for a successful future that includes enhanced value to members.
Using a four-phased merger prospecting and strategic analysis process will help establish both fit and focus of merger prospects.
Phase I: Assessment
Before entertaining mergers, your credit union must complete an internal/external assessment and determine its strategic vision. This is a vital component of establishing the viability of your credit union’s value proposition. Going through the work of this phase will provide synergistic direction for the credit union’s executive team and board. This assessment includes:
Vision for the future: Ask yourself, what do we as a CU want to accomplish? Considerations to assess include goals related to asset size, branch number and employee number; member demographics; member perception; delivery channels; products and services; market share/extension; and product extension/diversification.
Internal/external assessments: What are your current core competencies and untapped opportunities? What are your core limitations and external challenges? Answering these two questions will provide the key items for creating a search profile and determining your credit union’s value proposition. Specifically, the core competencies and untapped opportunities will provide a solid foundation for what your credit union can offer to a merger candidate (i.e. how your organization can enhance the merger candidate’s member value). Alternatively, the assessment of your credit union’s core limitations and external challenges will reveal potential gaps for your credit union to identify prospects where synergies and collaboration can be found.
Key hurdles assessment: It’s now time to ask the hard questions! What must be retained? What is negotiable? What are your walk-away points from the merger? As a merger prospect, your credit union will need to determine what’s negotiable. This will ensure that once a merger candidate is identified, your credit union is best positioned to move forward. Vital considerations that can make or break a merger include determination of the following:
- name of continuing credit union;
- leadership ;
- headquarters location;
- which CU’s charter remains;
- pricing and fee philosophy;
- board seats; and
- other “sacred cows” that would be deal breakers.
Imperative to note, a collaborative merger of two (or more) credit unions is a relationship-building exercise to gain trust and confidence in the underlying value of the partnership and enhance stakeholder value. If trust and member value cannot be achieved, regardless of the synergies identified, the merger will not succeed.
The assessments above will allow the executive team and board to determine the strategic vision, mission and goals for the current and future credit union. Thus, this becomes the road map for your CU’s merger strategy, as well as the rationale for potential merger prospect partners and walk-away points for consideration as prospects are identified.
Phase II: Value Proposition and Prospecting Considerations
Once your credit union’s assessment has been completed, it is time to begin the value proposition and prospecting considerations analysis. Here, your credit union will focus on identifying key merger candidates and narrowing the list by creating tiered prospect groupings (e.g. Tier 1, Tier 2, Tier 3, etc.). The tiered approach will help your credit union focus on ideal, favorable and tertiary prospect considerations.
High-level questions to address: With what type of partner would your credit union be able to leverage its own core capabilities in a merger?
- What type of partner would uncover and provide additional opportunities that your CU could capitalize on?
- What pressures is your credit union facing and what type of partner would help mitigate these?
- What type of partner would defend and augment the gaps your credit union may possess?
Qualitative member benefits to consider: Convenience: Would the combined physical distribution channels (branches) and other means (electronic) expand member access points and extend geographic presence?
Competitive pricing: How would the combination support the opportunity for a competitive rates and fees structure through combined financial resources?
Products and services: How would the combined entity create opportunities to fill current product and service gaps and establish ability to expand and support all points of contact?
Qualitative CU benefits to consider:
- improved operating efficiencies through combined systems and support networks;
- increased transactional revenue;
- greater presence in multi-dimensional/demographic marketplaces;
- increased lending opportunities;
- diversification of products and services;
- larger “sphere of influence”;
- proactive approach to remain relevant in industry and to members;
- larger asset and capital base to further member value efforts; and
- ability to retain and enhance board and community in the continuing CU.
Qualitative employee benefits to consider:
- employee growth opportunities based on larger organization;
- larger organization equates to a higher comparable peer group enabling comparable compensation ability; and
- ability to provide better training/cross-training due to increased number of employees.
Upon completion of the considerations above, your credit union will need to perform an analysis on both the quantitative and qualitative aspects of your merger candidates.
Phase III: Value Proposition Quantitative/Qualitative Analysis
Based on the value proposition considerations and tier-rating approach above, your CU must “crunch the numbers” and evaluate the candidate(s) to ensure the merger opportunity provides value to the current and future stakeholders of the continuing CU. Examples of various quantitative and qualitative considerations include:
Ratios: return on assets, loan-to-share ratio, net worth ratio, and delinquency ratio.
Complementary characteristics: geographic presence, products and technology, membership demographics, total assets and net worth.
Qualitative weighted scoring: reputation/brand image, CEO perspective, culture, challenges/opportunities.
The analysis of the above will further narrow your prospecting tier(s) and better determine the ideal partner for your CU. In addition, throughout the prospecting process, management should reassess any changes in vision and strategy. As the ultimate goal for both CUs is to enhance member value, it is vital that the CU retain its strategic vision and growth strategies.
The merger of a target CU provides many synergistic benefits for the continuing CU, as well as one-time costs. Therefore, the CU must understand how the merging credit union will support its short- and long-term strategic focus. Rather than focusing solely on distressed prospects, focus on targets that support your CU’s strategic goals.
For example, a CU that currently has a strategic initiative to enter into new geographic locations or market segments must focus on prospects that meet these criteria (both strategically, but also from a speed and cost perspective). Other examples of prospecting based on strategic reasoning include: consolidation of operations (i.e. one IT system), diversification of product/service offerings, and shared values.
Phase IV: Next Steps
Upon determination and consolidation of your prospecting profile and merger candidate tiers, it’s time to begin calling prospects. These calls become the access point and gauge for tier groupings and for determining their willingness to talk about synergy and a possible merger.
As previously noted, it is imperative that the merger of the two (or more) CUs is based on a positive relationship with trust and confidence in the underlying value of a partnership and providing enhanced stakeholder value. Establishing a cultural fit may take an extended period of time.
Mergers continue to be on the forefront of business continuance and survival in today’s economy, especially among financial institutions. They offer a viable solution to credit unions in terms of growth, sustainability, staying relevant, and providing enhanced value to members.
The above components are some of the critical considerations when beginning your merger prospecting and strategic growth development. Thinking about the key hurdles and assessments above, your credit union will ultimately position itself for success in the future and enhance member value.
David Ritter, CVA, is a shareholder with Doeren Mayhew, a CUES Supplier member based in Troy, Mich.
