10 Ways to Avoid Pitfalls During a Merger

Based on our experiences helping financial institutions evaluate potential mergers and successfully navigate the merger process, we’ve learned some critical lessons. Many of the common pitfalls to avoid happen during the planning process, while others can derail the best laid plans much later down the road. As more credit unions consider mergers as part of their long-term growth strategies, avoiding these common pitfalls has become more relevant than ever before.

Although the list is extensive, 10 pitfalls we see most often are qualitative and can often be managed with proper planning and preparation:

1. Agree on “non-negotiables” before exploring mergers with potential partners. If the key stakeholders within your credit union have not clearly identified what their non-negotiables (a.k.a. deal killers) are, beginning discussions with potential merger partners is often a waste of everyone’s time, effort and money. What exactly does “being the surviving entity” mean to you: Name, headquarters, majority of board seats, table officers, CEO/management team, culture, field of membership or federal/state charter? Write down a clear merger strategy and agree on key aspects internally first to avoid spinning your wheels.

2. Don’t be overly aggressive. No one wants to be the credit union others avoid because it is always asking for a merger. If you’re sending out postcards or otherwise advertising your intentions, you may make others in your market uneasy. Building trustworthy relationships as well as utilizing a third party to facilitate the prospecting process can help you find out who is open to exploring mergers while remaining anonymous. For many institutions, it’s the best option and prevents your team from turning into the credit union that everyone wants to avoid.

3. Ask the difficult questions early. And check your ego at the door. These are technically two potential pitfalls, but they are often related as egos may prevent the parties from asking the tough questions like who the surviving CEO or executive team members will be in the new organization. By taking a step back and focusing on what’s ideal for the new combined credit union stakeholders, members, employees, community and board, you will uncover new perspectives as well as save time, effort and money by negotiating what really matters. Both parties will also have a clearer picture of what’s ahead.

4. Discuss the functional org chart. Often, when two credit unions merge, the combined credit union will leapfrog into the next peer group. Contemplate what an org chart would look like for this larger institution including organic growth; there are often many more opportunities for employees to fill and grow into. Consider that there are two org charts: A short term (or integration phase) and a long term (steady state) org chart. What opportunities does this present for the combined credit union’s employees in the short term (e.g. branch operations integration lead, project manager of post-merger integration, etc.) and in the long term (e.g. instead of a chief lending officer, perhaps there would now be a chief consumer lending officer and a chief mortgage lending officer)?

5. Remember, this is not a for-profit transaction. In credit unions, it’s all about the people. Your members. Your employees. Your communities and your board. Most credit union boards are volunteers who have put their blood, sweat and tears into the organization. Don’t lose track of the humanistic component as you analyze the numbers and evaluate the possibilities. Take the time to ensure there is internal consensus about moving forward.

6. Know that communication is key. There is no such thing as over-communicating in relation to a merger. This is true both internally and externally. If you utilize a third party to help you navigate a merger, it can guide you in terms of what messages to craft and when to communicate them in the process to ensure that information is flowing to the right parties before, during and after a merger.

7. Bring the boards together. Once your organization is ready to move forward with a transaction, enable the boards of the two credit unions to meet periodically to discuss future governance policies. Suggest having someone review both and only have the boards focus on the key differences. Understand how both boards interact with the executive team and staff, not just the CEO, to gauge whether they are hands on or have a governance focus. What will the board’s role be in a combined organization?

8. Get all the cards on the table. Ensure that both credit unions share any actual or perceived negative items that could affect a value-added collaboration (e.g. legal issues, value concerns such as unfunded pension liabilities, etc.). These items need to be shared early in the process. If you are concerned with a certain aspect of the transaction having negative consequences, such as a key branch being closed, consider crafting that into a merger agreement as a supermajority item.

9. Bring the employees into the integration process. Communication and transparency are key. Remember, in the end, they are all our members and our employees. Members will take their cues from the friendly employees they’ve come to know and love. Protect those local relationships and the combined team’s morale.

10. Put regulators at ease by showing you’ve met your fiduciary responsibility.  Ensure both qualitative (strategic, structural, etc.) and quantitative items such as detailed due diligence, fair valuation and combined financial projections are prepared and used to help with your decision making. This will also show your regulator that you’ve done your homework and make their review process simpler.

Remember, the merger process takes time. On average, most successful transactions will take from 18 months to two years or more from the initial planning phase to the legal effective date of the merger. Don’t wait to develop your merger strategy or have those tough internal conversations. Concurrently, opportunities surface for those who are actively involved in exploring mergers; they are proactive, not reactive. Outside partners can help facilitate this, so you don’t have to go it alone. The sooner you gain internal clarity, the better positioned you’ll be to pursue strategic growth opportunities as they arise.

David Ritter is Managing Director for ALM First Financial Advisors. He can be reached at 248-765-2758 or dritter@almfirst.com.