To Merge or Not to Merge?

CU360
December 3, 2009 | COMMENTS

What should credit union executives think of when considering a merger and consolidation? That's the question recently put to Credit Union Retired Executives (CURE)—an online network of former credit union executives who volunteer their time to support those currently working in credit unions.

Here are some of their responses, with thoughts on what would be helpful to both the credit union initiating the merger and the one being merged:

What's the key question boards should answer when considering a merger?

In my experience, involving many mergers, the key question both credit unions must deal with involves their members. How will a merger benefit the members of both credit unions—especially the one being taken over? The boards of both credit unions should address this. The members, for example, might receive a greater variety of products, more branches, and better pricing.

Unfortunately, some directors think only about themselves. Some ask, “Will I still be a board member?” In my experience, it was always helpful if the merging credit union had some financial issue that made the merger necessary. And in every case I saw, the members of both credit unions benefited from the merger. 

What specific areas should be considered?

Financial viability and capital. When a credit union merges with a troubled credit union, NCUA will often make the financial implications more palatable by removing the bad assets or making the credit union whole, as in the case of fraud. In a merger of equals, heavy consideration must be given to the financial condition of both credit unions, and to the amount of capital available after merger. NCUA will certainly be scrutinizing any voluntary merger for ongoing financial viability more than it would scrutinize a regulator-assisted merger and acquisition.

Mutual member benefit. Advantages can be realized with a larger credit union—a lower cost of delivery, greater reach, more products, and additional delivery channels.

Corporate culture. Everyone talks about this, but do they really understand how to integrate different cultures in a merger? A tremendous amount of time and attention are needed to meld the staffs into a cohesive working unit.

Generative thinking. The idea is to bring boards into the earlier stages of the thought process on really big issues, especially those critical to organizational health. To do this, boards need to engage earlier and frame the discussions more strategically, with an eye toward the credit union's mission over the long term.

Do you have any examples of mergers that didn't turn out the way you thought they would?

I've handled about 10 mergers. We went through with about half and declined the other half after due diligence. We were—or would have been—the surviving credit union in every case.

In some cases, we recommended that the credit unions continue without merging because they provided specific services that benefited members, and these services would have been difficult for another credit union to provide.

In other cases, we recommended that they merge with a different credit union, usually one with a similar sponsor or membership base. Such a merger would likely benefit both credit unions and their members. Since both credit unions were usually small, we either helped out or handled the merger for them.

In the other cases, we went forward with the merger ourselves. In some instances, we already had overlapping fields of membership and often found that their members already had accounts at our credit union. Sometimes the merging credit union was in such poor financial condition that if we didn't merge, it would probably have failed, and we didn't want the publicity of a failing credit union in the local news.

In other situations, a merger would give members additional convenience or products and services, and in those cases the membership vote was usually at or near 100% in favor of the merger.

What do successful mergers have in common?

The mergers that work are the ones that are a win-win for both parties. A merger can lead to more or improved services for members, greater opportunities for employees, salary increases for staff, new branch locations, and sometimes a buyout and early retirement for one of the CEOs. To make any merger work, you need thorough due diligence on both sides and an understanding of expectations mixed with honesty, integrity, and respect.

Consolidation through mergers is necessary for our future. While small niche credit unions can survive, survival is not enough today. We need to grow, provide the necessary services to our members, and be relevant in today's marketplace. Mergers make sense where overlaps exist, where the financials dictate, and where the survival or the expansion of the credit union would benefit members.

The bottom line is that to cut costs, eliminate duplication, and attain economies of scale, you must consolidate—or if not consolidate, then at least work together through collaboration.

CURE's retired executives are available 24/7 and located at CUretiredexecs.com. Advisers provide free, confidential, customized answers to questions about credit union management within three business days.