Strategize for the Future During M&A Process

Credit unions have always bonded well with other credit unions. They share best practices, attend the same conferences, regularly read CU Times and even call themselves co-ops. Evidently, credit unions also like to merge. This year has been no different. According to NCUA reports, there were 43 consolidations in the first quarter of 2018.

During most instances, the decision to merge is a noble strategy to strengthen and expand membership for the joining credit unions. There are three primary reasons credit unions typically merge:

1. Consolidate resources, including staff, products and services;

2. Expand field of membership, geographically or otherwise; and

3. Improve and prepare for the future.

Most organizations want M&A to follow a basic financial to customer growth formula of 1+1 = 5. In reality, most mergers are 1+1 = 2, or worse, 1+1 = 1, meaning the projected value never gets realized. Credit unions are not much different than other industries in this regard. Some M&A experts underscore that the majority of mergers fail due primarily to the integration process. Well, we disagree. We certainly see integration as a challenge, however we do not equate it as the root cause for failure. The real failure and biggest challenge is the overall lack of business strategy to strengthen and future-proof the combined credit unions.

While logistics of the merging deal are being completed, a simultaneous plan should be developed to invent a brand new market for the credit union to truly differentiate itself from other financial institutions. We call this market invention. It’s the process that follows how organizations combine business strategy and innovation with marketing to disrupt entire industries, including the credit union industry.

As mentioned, a geographic and membership expansion is the primary rationalization and strategy for credit unions to merge, because the industry typically has little differentiation other than rates and relationships.

Let’s play out a scenario we have seen multiple times to illustrate this point. A regional credit union merges with another nearby credit union to expand its footprint and multiply its assets. Based on everything we know, the credit unions were a great fit and there was a seamless integration financially, culturally and operationally. Now, fast forward one year later, and the executive team is sitting in a conference room debating on why the M&A never multiplied its assets as predicted. In reality, the credit union actually contracted in the new geographic market. So what’s the issue? The integration was seamless, right? Well, the root cause of the issue was that the credit union acquired into a new market without first leveraging a market invention process to identify the right M&A target that would disrupt the market and make the combined credit unions a leader in the new market.

If you are not the leader in a respective market, you cannot simply out-advertise the competition without first inventing a new market for the credit union and follow the market invention process.

So instead of just thinking M&A for simple geographic or field of membership expansion, ask whether there is another credit union you can merge with or acquire that helps you invent a new market. Our CU Times article from earlier this year, “5 Market Invention Trends for Credit Unions,” offers ideas to potentially leverage.

Here are three important takeaway questions to ask prior to determining if a merger is a right fit in the vain of inventing a new market:

1. Is the M&A target the established leader in the new market you are inventing?

2. Do you even need to merge with another credit union to make your market invention vision complete?

3. Does a merger accelerate the speed to create a new market?

If you are currently exploring an M&A target, then it is important to first understand the dynamics of inventing a new market. The credit union’s future depends on it.

Adam Vasquez is President/CEO of Merit. He can be reached at 717-652-0100 or avasquez@madewithmerit.com.