KENT, Wash.—Credit unions continue to announce mergers at a pace of approximately one per day, yet one analyst noted that very few actually have a robust merger plan in place.
“Undoubtedly, mergers have been a key topic of discussion as credit unions conducted their 2016 strategic planning sessions,” said Glenn Christensen of CEO Advisory Group. “Yet for many credit unions the extent of the merger plan is to state that they are important and the credit union will make an effort to evaluate merger opportunities presented to them.”
Whether the credit union is looking to acquire other CUs or believes it will merge into another in the future, a proactive merger plan can make a huge difference in the ultimate success of future consolidations, said Christensen.
“Achieving success has become increasingly difficult with changing consumer behavior, hyper-evolution of technology, ever-increasing competition and the burden of the regulatory environment,” Christensen said. “These forces are causing greater numbers of credit unions to acknowledge that mergers may be in their future. A merger plan can greatly enhance the choices you have in selecting merger partners.”
What To Do When Looking To Merge Out
When building a plan for a credit union looking to someday be acquired, Christensen said the CU must initially assess what value the credit union offers to an acquirer, and address the following questions and issues:
Field of membership: Does the current field of membership provide value to acquirers? Could the CU enhance its value by expanding the FOM to include new geographic areas that would be of value to potential acquirers? “We recently facilitated an interstate merger where one of the key values to the merger was the ability of the merged credit union to expand their FOM allowing the acquirer to come into a new market with a much larger footprint allowing them to make a solid business case,” said Christensen.
Contracts: When negotiating contracts, consider shortening terms. Negotiate less burdensome exit clauses, said Christensen. “Let your vendors know you want flexibility in the event of a merger. One of our recent clients has known for several years that a merger was in their future, so they designed all of their key contracts to expire the same year of the anticipated merger.”
Net worth ratio: Increasingly, acquiring credit unions are not willing to merge in credit unions that will dilute their net worth ratios, explained Christensen. It is more advantageous for credit unions to merge early in a downward cycle than waiting too long and seeing their net worth position declining, he said.
Asset size: The asset threshold for when a credit union would consider acquiring another credit union continues to increase every year, noted Christensen. “Many credit union acquirers simply feel it is not worth the bother to merge in a credit union below a certain size, which means you will have fewer options the longer you wait to consider a merger. Today, many credit unions simply won’t look at credit unions with under $100 million in assets.”
CEO retirement: Mergers often coincide with the retirement of the CEO. As new leadership brings about change in any event, credit unions should consider a merger as an option to succession planning, advised Christensen.
Change of control agreement: “It is very difficult for a credit union CEO to be unbiased about a merger when their position and compensation are at stake. Credit union directors need to ensure their CEOs are protected with change of control agreements or provisions in their employment contracts,” Christensen advised.
Merger partner evaluation: Establish reasonable criteria for evaluating partners. Consider working with a third-party advisor to generate a list of possible candidates, said Christensen. “They can also work with you to package or market the credit union on your behalf. Many advisors work with credit unions with fees contingent on a completed merger.”
What To Do When Looking To Acquire
When building a plan for a credit union looking to acquire a credit union, Christensen said the CU must initially assess why a credit union would want to merge in, what is the CU’s value proposition, and address the following:
Glenn Christensen
Markets: “Credit unions should have a strategic growth plan that delineates the markets in which to compete in the near and long term. Establish market objectives such as infill or new market entry,” Christensen said.
Target list: Create a list of target credit unions within the identified markets that meet selection criteria such as size, FOM and net worth ratio.
Value proposition: Create a presentation that clearly articulates the CU’s value proposition to targets.
Relationship building: “Credit unions will need to build relationships with the targets with the intent to discuss a possible partnership. Some credit union CEOs opt to work with third-party advisors to assist in this process,” Christensen explained.
Discovery: The merger plan may address how and who will facilitate and document the dialog between the credit unions to discover the value of the partnership and to move it toward a letter of intent and merger agreement, Christensen said.
Technology: “In order to build core competency, your credit union may implement a merger technology platform to systematize the process all the way from target identification through integration, advised Christensen. “Doing a merger once every ten years and having to relearn the merger process is burdensome. With a plan and systematized process that can be replicated for multiple mergers, the credit union builds core competency. In turn, this further improves the economics of credit union mergers. The credit union positions itself to do multiple mergers per year and gains significant strategic advantage.”