In today's economic climate, mergers and consolidations of financial institutions are fairly common. Anyone who has been involved in one knows it is a time of opportunity and critical decisions. So many considerations go into such transactions, most of which legal teams oversee. There are benefits of working with companies offering proprietary benchmarks and experience that goes well beyond the scope of work offered by traditional advisors – bringing an innovative and proven approach that mitigates expenses and maximizes revenue.
When a credit union goes through a merger or an acquisition, there are often conflicting vendor contracts, many with time constraints or financial penalties. The easy solution is for the acquiring institution to force the consolidated organization out of their existing vendor contracts. But this doesn't always make the most financial sense, as it often involves penalties and a potential lapse in customer access to certain programs.
How can you minimize liability and even increase your institution's buying power during this transition? An objective third party can play a vital role in contract outcomes. There is a need to research and present options before an acquisition or merger. Negotiating after the fact is harder, and the credit union might get stuck with what was purchased, so there is a need to have all of the information before signing on that dotted line.
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There are certain "red flags" to be aware of with vendor contracts when going into a consolidation:
- What kind of auto-renew language is built into contracts?
- Could the credit union be missing an opportunity to maximize the larger buying power by not looking at the big picture of the vendor relationships? If the merged credit union has a variety of vendors for internet banking, core processing, and credit and debit card operations, and these vendors are not taken into consideration, the merging credit union may not be leveraging all of the opportunities available to the combined organization.
- Were all of the negotiations completed before the deal closed? This sounds like a no-brainer but there are cases of acquired credit unions canceling all of their vendor agreements before the acquisition date. Who pays all of those termination fees? The acquiring organization may be liable for these expenses and not know it.
- When negotiating vendor contract agreements, is the credit union taking into account future acquisitions? The credit union could be missing out on volume-based pricing scenarios or cases where there are benefits from bringing in other relationships under the same agreement.
- Is the termination language properly considered? There may be room for negotiations and the credit union being acquired could have better cancelation language than the acquiring credit union.
Is there a need for in-house or vendor-provided services for the new organization? Are the service level needs from contracts post-merger the same as pre-merger?
Are there emotional attachments to long-term vendor relationships that are getting in the way of prudent financial decisions? An outside consultant can be objective and still sensitive to cultural needs of both institutions.
There is never a more critical time to be flexible and knowledgeable regarding options than during an acquisition or merger. It is a time when both the tone of a vendor relationship and all of the contractual options should be leveraged to your potential benefit. An outside expert who can "see the forest through the trees" and has experience across many vendors and financial institutions is prudent in guiding the best decisions in the midst of change-based opportunity.
Patrick Goodwin is President of Strategic Resource Management, Inc. He can be reached at 901-681-0204 or [email protected].
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