Members Deserve Better Information in Merger Decision-Making

Two reasons cited in nearly every merger application and press release: Economies of scale and expanded services. Seriously, they could come pre-printed on merger applications.

But is there empirical proof that these mergers generate economies of scale? Or that members receive expanded services? Is that what really happens after mergers?

Surprisingly, the evidence would suggest that using broad claims without definitive supporting data to justify credit union mergers is not very different from mergers in other industries.

Dr. John Sullivan, a noted industry and academic merger expert, taught a course on mergers and acquisitions for many years at Boston University. After analyzing mergers from both a consulting and academic standpoint, Dr. Sullivan concluded that while nearly all mergers cite economies of scale and expanded product and service lines as their justification, they rarely result in economy-of-scale benefits that are passed on to consumers.

Sullivan concluded that in nearly all cases, the overriding reasons for the mergers were access to new markets and reduced competition. Specific to the financial services industry, Sullivan concluded, “Like most acquisitions, the rationale for these (financial institution mergers) has been to improve their competitive edge, leverage technology, diversification, take advantage of synergies, and to increase economies of scale. But, if these deals do, in fact, reach their goals of expense reduction and improved profitability, the customers should also benefit from mergers. The unfortunate fact is that (financial institution) customers have not seen their fees reduced. It is ironic that the (banks) with the most leverage have the highest ATM fees in the industry.”

There is plenty of room for improvement in merger applications and pre-vote member disclosure standards that would provide credit union members with more than a “check the box,” euphemism-based rationale.

Pre-merger analysis. When the option to liquidate in lieu of a merger is even mentioned in pre-merger reviews, it is usually accompanied by a blanket statement that liquidation expenses would make this option unattractive. One aspect of credit union mergers that is indeed unique compared to other industries is the practice of merging smaller, adequately or well-capitalized credit unions without any return of equity to the members. One would be hard-pressed to find the management of a solvent public company recommending a merger to shareholders with no consideration of the return of equity.  If members are indeed owners, shouldn’t they be treated as such? If liquidation is too expensive to justify and no equity can be returned to members in a merger, let’s show the projections that support that rather than the throw-away general justification statement of “too expensive.”

Timing of merger. The reasons cited to support most mergers – economies of scale and a broader range of services – would generally apply for many years prior to the submission of the merger plan. So why is the merger occurring now? In many cases, the merger timing coincides with the retirement of a “key” person. If a merger is more beneficial to members than replacing the “key” person, stating rational, defensible reasons for this situation would result in a more credible member disclosure and vote recommendation package.

Empirical projections of economies of scale. Regulators and industry best practices often call for detailed financial projections supported by defensible assumptions. This standard should be applied to data supplied to regulators and voting credit union members considering merger applications. While predictions will never be an exact science, there is certainly plenty of room to move toward more data- and evidence-based projections.

Economy-of-scale projections. How many positions would be eliminated? What would be the total salary saved? Number of offices or branches to be closed? Time frame for savings? What tangible results will members experience as a result of these economies of scale, and to what degree? How much would fees be reduced? How much in higher rates on savings and lower rates on loans?

Expanded services. In most cases, a larger continuing credit union will have a longer list of services than the smaller merging credit union that can be used to support this claim. But what does that mean to the individual member of the merging credit union? Are any of the “new services” not already available to the merging member simply by moving their account to a different credit union or even a bank? In cases where the continuing credit union is a community charter in the same area or a multiple SEG field of membership, would the members of the merging credit union not have been allowed to join the continuing credit union by opening a share account if they so desired? If the continuing credit union is confident in its superior line of services, did leadership consider applying to expand its FOM and compete for these potential members if they were not already in its FOM?

Why Does Any of This Matter?

In modern times, once a consolidation trend is established in an industry, it rarely reverses. So, what’s the point of documenting and measuring these considerations?

Consolidation comes at a cost. The uniqueness of small credit unions and the ability of the industry to cite uniqueness as a defense of the tax exemption are two factors that immediately come to mind. By their nature, mergers decrease competition, which typically does not favor the members or consumers at large. So, if a prospective merger will empirically benefit members, it’s critical to support it with quantitative, defensible projections.

In most cases, even if objective analysis does not yield a clear affirmation of the merger plan, human factors, such as personnel, governance and compensation issues, may push the merger over the finish line. However,  this kind of empirical analysis might reveal those cases where a well-capitalized, financially healthy small credit union with an active member base could better serve its members by replacing departing key management personnel or even those cases where a liquidation would better serve the merging credit union’s members.

When mergers lack empirically demonstrable evidence to support them, their necessity becomes more questionable. In an age where the public demands greater transparency and enjoys easy and instant access to data, providing detailed and well-developed projections would result in a better-informed voting member base and regulatory decision. When asked to cast a vote, members deserve better data than euphemisms, platitudes and generalities.

David Savoie is President/CEO for the $142 million, Metairie, La.-based Louisiana Corporate Credit Union.