How to Proactively Plan for Post-Pandemic Merger Opportunities

While no one knows what the full impact of the current COVID-19 crisis will be, 40.8 million jobless claims as of May 28, 2020 will most likely have an effect on credit unions and community banks in the near and longer term. With economic uncertainty continuing, community financial institutions of all sizes may begin proactively seeking new opportunities to join forces and serve a bigger base through consolidation in the months and years ahead.

Credit union mergers are often unique. Although one of the credit unions in a merger will be absorbed (terminating their charter), there is typically no exchange of consideration (e.g. cash purchase price) for the merger. This can be a huge positive; however, the challenges of credit union mergers can often be more emotional than other types of acquisitions. For example, common statements at the onset of exploring mergers include: “We must be the surviving entity,” “We must have a majority of board members” and “Our name has enormous brand value.”

Should Your Credit Union Develop a Merger Strategy?

Like every other decision a credit union makes, this one should begin by focusing on the best interests of its members and other key stakeholders. Whether your organization would be the surviving entity and is simply looking for more cost-effective strategic growth opportunities, or your organization would be the one absorbed, clearly analyzing how stakeholders could benefit is critical.

Whether it is a proactive or reactive approach to mergers, your initial analysis and any resulting strategy should be founded on a predetermined and well-defined value proposition for the members, the credit union, employees and their communities/board to alleviate wasting time, effort and money. Although your members may be highly loyal and active, and your credit union may be satisfied with its current growth trajectory and management team, preparing for inorganic growth opportunities should be an integral part of any credit union’s normal strategic plan.

What Is the Strategic Value Proposition?

There are a multitude of stakeholders in a credit union merger; however, focusing on the following four categories will provide a foundation for assessing the potential value proposition(s) that are relevant for your credit union. The following example questions often uncover key drivers of credit union mergers.

Members

• Convenience: Should we provide for a larger geographical presence? Increase member access points and extend geographical coverage with more face-to-face locations?
• Price: Do we support opportunities for competitive rates through combined financial resources?
• Products and services: How can we create opportunities to research and implement products and services faster when member needs change?
• Service/familiarity: How do we retain and obtain a friendly, recognizable employee base and leadership?

Credit Union

• Scale/operating efficiencies: Can this be enhanced through combined systems and networks?
• Preemptive approach: How do we remain sustainable and relevant to members?
• Market penetration: Can we create greater presence in multi-dimensional/demographic marketplaces?
• Diversification: How do we accommodate widened demand, product and service usage?
• Liquidity: Do we need increased liquidity/funding mechanisms?
• Asset/capital base: How do we ensure the larger institution allows for continued reinvestment in members?
• Employee base: Are we looking for a larger selection of employees to identify future leadership and create succession plans?
• Culture: Are we looking to strengthen our common stakeholder bond?

Employees

• Growth: Will we provide additional opportunities provided by larger credit unions?
• Compensation: Will movement into next the peer size allow us to provide higher comparable compensation packages?
• Knowledge: Are we looking to offer enhanced cross training, specialized opportunities and collaborative ideas due to the increased number of employees?
• Human capital: Do we want to be able to take a proactive approach to retain and obtain new talent, rather than having to fight for staff if faced with a takeover?

Board/Community Services

• Brand: Will a greater presence in the communities we serve help us build an even stronger brand?
• Giving back: Are we seeking a larger asset base to enable continued contributions to the communities served?
• Community interest: Will we gain representation by board members from the geographic area and field of membership served?

How Can a Merger Be Structured? What Are Your Negotiation Points?

Before exploring mergers with any potential partner, you must internally agree on your credit union’s walkaway (a.k.a. deal killer) points. At a minimum, the following points need to be clearly agreed to in a written document regarding what you are willing to negotiate: Name, charter, board representation, executive board officers, employee leadership, strategic vision, organizational structure, culture, headquarters, core system and technology.

As you discuss what is most important for your members and other key stakeholders, you may be surprised at some of the points that are now up for negotiation. This is especially true as the economic environment and other factors evolve.

5 Steps to Take Now

If your credit union decides that a merger strategy does make sense, now is the time to put a specific plan in writing and prepare for the opportunities that may present themselves down the road.

1. Create a written M&A plan that includes the “what” and the “how.”

2. Get plan approval by the board and management team before exploring with a partner.

3. Build personal relationships with your partners through one-on-one discussions – not via mass distribution emails or postcards.

4. Sign NDAs and ask the difficult questions early.

5. Leave egos at the door.

The credit union industry is small – everyone knows everyone – and word travels fast, so be careful in how you approach potential partners.

As always, if your approach to creating a merger strategy begins with the goal of doing the right thing by members, the credit unions, employees and communities served/boards of directors, your cooperative will be heading in the right direction and better prepared for whatever the future may hold.

David Ritter is Managing Director for financial advisory services firm ALM First headquartered in Dallas, Texas.