Defining and prioritizing the key reason(s) for a merger helps clarify what the merger can bring to the membership and identifies how a merger can provide alignment between the board and management.

2. Prepare for the merger life cycle before embarking on a merger. Mergers are hard work. Credit union “buyers” need to be ready to allocate resources to perform diligence for integration – from planning to execution. Does the credit union have the resources/skills to do a merger and execute against the business plan? Many credit unions can successfully ask their teams to do an integration while performing their “day jobs” – but many can't. The merger's impact on the core strategic plan is an important discussion to have during the strategic planning process. 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 a merger. Boards and management should have a clear view of how they will respond if they are approached about a possible combination. Rather than an emotional “no,” a credit union should take the time to think about a scenario where it might make sense to not be the surviving credit union, including mission-critical strategies, competitive position, and current and future member base. Two key questions the credit union should be prepared to answer are:

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

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

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

Merger of Equals

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

If an MOE is successful and the credit union achieves scale and financial flexibility, the next critical strategic question is: How does 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 it build capital/earnings?

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

Getting consensus on performance levels and risk appetite is critical in the early stages of discussion. If the two credit unions can't agree on these areas ahead of time, it would be better to part as friends than to have a misalignment that destroys member value.

Credit unions should take care not to get caught up in the spirit of “everyone else is doing it.” A merger clearly has a place in enhancing member value, but it is important to look before you leap to make sure the dream of member value is actually realized.

Vincent Hui is Senior Director for Cornerstone Advisors. He can be reached at 480-423-2030 or [email protected].