A Strategic Framework for Board Members When Considering Mergers

Increasingly, discussions at industry directors’ conferences are gravitating towards the topic of mergers. Board members are curious about how their counterparts at other cooperatives are looking at mergers. The drastically changing competitive landscape has some boards doing a double take of their business model and wondering what it will take for their credit union to thrive, not just survive. According to the NCUA, 130 credit union mergers have been scheduled for member votes in 2024. ALM First’s role in some of the like sized credit union mergers this year has provided us with insights into how some boards are opting to proactively accelerate their strategic position.

Making the situation even more complex, the rate of CEO succession is not slowing down. Our team works with boards years in advance to strategically navigate this conversation, increase succession options, and run through scenarios. One scenario we are seeing more frequently is prospective CEO candidates offering to be another cooperative’s next CEO and bring their current credit union with them. Reacting to this conversation can create avoidable tension, gum up the CEO succession process, and test the patience of well-qualified candidates while the board drafts a, sometimes rushed, response. In this scenario, boards often end up back at square one.

Regardless of a board’s interest in pursuing mergers or not, the strategic governance question boards should proactively answer is, what is our merger posture? A merger posture is a definitely declared set of guiding principles and priorities that reflect the board’s approach to mergers and acquisitions. In other words, it’s a documented strategic framework that outlines how the organization will proactively, or passively, engage in large-scale strategic growth options. It puts rails on how boards and executives will approach merger conversations. The journey to develop a merger posture will reveal assumptions, priorities and clarify desired outcomes. Without a merger posture, boards invite friction into the process.

Here are a few key questions boards should ask from a strategic governance perspective to help develop a merger posture.

1. What will be most important to our members in five years? How will we satisfy evolving member expectations?

Typically, director responses refer to institutional value variables such as better products, services, pricing, technological capabilities, streamlined operations and attracting top talent. These are part of the “why” credit unions are in business. The operative question then becomes, “how” is your cooperative going to get there? Again, the usual response is “to grow.”

2. Why growth? And how much growth do we want?

Defining why growth is important and individual perspectives on desired growth rates will ultimately lead to a gut-check conversation on net worth and risk, among other things. A strategic understanding of the opportunity and challenge of achieving an aggressive level of growth can be a sobering conversation. One trend is hard to ignore, larger organizations tend to grow the fastest. Ambitious, fast-paced growth can also sometimes equate to inefficient growth.

3. What would cause the board to declare mergers “very important” to the credit union’s growth strategy in the next five years?

If we’ve all learned anything from the last five years, it is that the environment can change drastically and without warning. If boards assert that mergers are not important today, what would make them tomorrow? This question helps identify the external and internal variables that have an outsized influence on their organization’s success. For example, a big player could enter the marketplace with better rates and products, overshadowing the organization’s value proposition. An exodus of talent could occur or auditors could uncover serious mismanagement of the operations. Interest rates could zig while unemployment (and credit risk exposure) zags. Key vendors could have a cyber breach or members’ employment and industry sectors could get Ubered. Crazier things have happened.

4. Down range, what is most critical for success in a merger? What will not be critical?

It is easy to reflect back personally and professionally and realize that some things, in the long run, were not as important as they initially seemed. The framing of this question seeks to extract a down-range perspective and make decisions that benefit the future organization. This is different from asking what is important to the board today. For example, “keeping our charter” is often pretty high up on the list initially. However, unless the charter has unique business, not sentimental, characteristics that will be amplified by the new business model, then why is it important today if it’s not critical in the future? Said differently, another institution’s charter may be more beneficial to the membership in the long run. And if so, it’s better to deprioritize the charter factor now.

Another factor commonly cited as important is board and CEO representation. This is usually the stickiest part of a merger transaction often because it is not proactively addressed as part of the merger posture. Discussing this question will reveal biases, interpersonal relationships and the importance of leadership continuity. Additionally, it should be an opportunity to think into the future and objectively evaluate what would benefit the future organization most. In practice, prioritizing (and deprioritizing) these variables makes strategic partnership conversations go more smoothly. For example, during one board’s merger posture development, survey results stated that retaining the chair position was not as important as other variables such as enhancing member value. This feedback provided the chair with the clarity needed to negotiate on behalf of the members (not themselves) should a merger opportunity present itself.

5. Why should we not pursue mergers and acquisitions? What might be the opportunity costs?

Exploring the “buy vs. build” dilemma is essential. Rather than merging to gain access to technology or talent, institutions might consider building capabilities in-house if they align better with their tried-and-true mission. For example, if achieving operational efficiency is a priority, institutionalizing Lean Problem Solving, implementing an emerging leaders program or augmenting balance sheet management practices are potential methodologies without the complexities of a merger. Understanding the opportunity costs of a merger allows for a balanced view on whether it could be a distraction or a force multiplier.

6. What should be important to a potential merger partner?

Understanding the priorities of a prospective partner is equally important. Why should they be interested in your institution? What would give them pause? An unbiased self-evaluation from an outsider’s perspective can reveal attractive characteristics and competitive advantages as well as potentially ignored blemishes. For example, your organization may have a robust branch footprint, yet a prospect might have a better sales and service model. An honest and documented discussion will identify areas for mutual growth.

Preparing for Future Opportunities

In today’s environment, the question isn’t “if” but “when” a merger opportunity will arise. Rigorously and speculatively exploring this conversation creates an opportunity for strategic, not action-oriented, dialogue. Developing a merger posture, informed by both quantitative and qualitative insights, ensures that the institution is prepared to evaluate opportunities confidently and in line with its long-term vision. When another board chair initiates a “partnership” conversation, a well-prepared institution will be ready to engage thoughtfully and strategically – because, as the saying goes, luck favors the prepared.

Peter Myers is SVP for DDJ Myers, an ALM First Company, in Phoenix, Ariz.

David Ritter is Managing Director, M&A Advisory for ALM First in Dallas, Texas.