Viewing Mergers Through a Strategy Lens
Credit unions without a differentiated strategy will sooner or later be acquired.
I’m a Michael Porter fanboy. If Comic Con put on an offshoot convention for strategic thinkers, I’d totally cosplay the famous Harvard Business School strategy professor. I’d dye my hair gray, buy some tortoiseshell glasses along with a tweed jacket and proclaim, “The essence of strategy is choosing what not to do,” or, “The essence of strategy is choosing to perform activities differently than rivals do.”
These two quotes come from Porter’s seminal 1996 article entitled “What is Strategy?” and form the basis of any organization’s strategy. It sounds simple, but it’s not.
For instance, at your next strategy meeting, ask your assembled luminaries two questions:
- In the last 24 months, what have we consciously stopped doing?
- As an organization, what is the one thing we do so differently that normal people talk about it?
For the first question, chances are your team of senior leaders will struggle to identify anything until an awkward amount of time elapses, when someone slowly raises their hand and says, “Well, we finally got rid of traveler’s checks!” On the next question, you’ll likely get a finessed answer that tortuously attempts to explain how your mortgage or checking product offers outstanding value compared to the credit union down the street. With very few exceptions, most credit unions have a generic strategy without much thought put into trade-offs (e.g., saying no) or differentiation (e.g., doing things differently from your competition).
Competition in the retail banking sector has been on a slow boil the past few decades, but we are getting close to the magical 212-degree Fahrenheit temperature where the boiling turns into roiling. Credit unions need to set their differentiated strategies now, especially considering the emerging competitive environment.
Here are some topics to consider as early warning (weak) signals of large change: Consolidation of banks and credit unions has been on a steady pace for decades. Challenger banks and fintechs are moving up the value chain as predicted by another Harvard professor, Clayton Christensen, in the book “The Innovator’s Dilemma.” Consumers are used to (and expect) frictionless, contactless delivery of products and services. Suppliers who furnish essential technology services are limiting your ability to meet emerging consumer needs. Regulation is a consistent hum that fluctuates with the policymakers in charge. The long and short of Porter’s teaching boils down to this: Stop piling on more ornaments and tinsel to your Christmas tree.
Unfortunately, for so many credit unions, the environment is getting to be, in the words of my oldest kid, “too much.” As the pandemic becomes a normal part of our lives, we are starting to have the prosaic (and perennial) debate of whether credit union mergers are an appropriate strategy, or not. Below are some thoughts on a framework for assessing the answer to this question.
First, if you don’t have a differentiated strategy, sooner or later, you will be acquired. All the competitive forces mentioned above can be ameliorated by a strong strategy. Alternatively, a weak strategy magnifies these forces, leading to a dead-end of being irrelevant to your members, getting too behind on technology, treading water on regulation or a combination thereof.
Second, if you don’t have a merger strategy, sooner or later, you will be acquired. Consolidation of credit unions started in 1969 with a peak of 23,866 credit unions. Today we have 5,133 credit unions. Whether you are a fan of mergers or not, chances are this trend will continue leading us to the mathematical certainty that your institution will either acquire or be acquired in the near future. Credit unions need to create a stance about where their institution sits on the merger continuum. Saying, “We don’t want to merge” is an equally valid strategy as, “We want to merge in credit unions with these 25 characteristics.”
Third, think differently about mergers. The vast majority of credit union mergers (Filene Research Institute pegs it at upwards of 95% of all mergers) involve a larger, healthy credit union acquiring a smaller, unhealthy credit union. Of late, I’ve been intrigued by the handful of so-called mergers of equals whereby two similarly sized, healthy credit unions seek out what annoying business people called “synergies.” In the for-profit world, this word is code for cost cutting, but in the credit union context it means two plus two truly equals five.
Over the past few months, I’ve had the opportunity to talk with (and advise) a handful of these mergers of equals leaders. Their experiences ranged from “just completed” to “been here for five years,” but I detected an approach that was common to every case: Extreme maturity. Mergers of equal participants all look out to the future and acknowledge that joining forces is the most likely path for both of their organizations’ success. The key drivers for these mergers cluster around the following elements: Complimentary talent, similar technology tools and, yes, economies of scale. It is important to acknowledge that in each of these mergers of equals, people (board and staff) are stepping into an uncertain environment that puts a bunch of things at risk (e.g., job titles) for the hope of a better credit union for their members and potential members.
Porter would likely look at this topic and pull out this instructive statement, “Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.” As the consumer finance environment gets trickier and trickier to succeed in, you’ve got some trade-offs to ponder.
You don’t need a master strategist to make those choices. Instead, evaluate how differentiated your strategy is, evaluate your merger strategy and examine the potential of a merger of equals. Answering these questions will help you make proactive decisions, or as the hipster vaccine inventor Louis Pastuer once said, “Chance favors the prepared mind.”
George Hofheimer Founder Hofheimer Strategy Advisors Madison, Wis.