Making Mergers Work: Seven Golden Rules from US Credit Unions
By Michael Mavaddat, Managing Director, Consulting Services
and Franck Schuurmans, Ph.D., CAE, Director, Non-Profit Practice
Mergers are occurring rapidly in the once-staid world of credit unions. With deregulation and rising competition, the highly fragmented world of these member-owned financial cooperatives is consolidating. Institutions are turning to mergers as they seek to leverage economies of scale, scope of products and expanded delivery channels and charters to serve their members better.
Since many credit unions originated around a single company or organization, the industry is very fragmented. There are over 9,000 credit unions in the United States, with 7,000 having less than $20 million in assets. Some 80% of all assets are in the hands of 850 large credit unions. Since deregulation in the late 1970s and early 1980s, the industry has begun a seismic shift. As they consolidate and expand their scope, credit unions are moving from plain vanilla, single corporate sponsor models to more complex business models.
With this shift, the pace of mergers has accelerated and their nature has changed. Where weak credit unions once sought refuge in a strong acquirer, we are now increasingly seeing mergers of two strong players. One recent illustration is the planned merger between the $293 million, 32,700-member Atlantic Credit Union and the $653 million, 85,000-member Citadel FCU.
In addition to regulatory changes, mergers have also been driven by new technologies and increasing competition, particularly from banks and other financial institutions. From New York to Los Angeles, it is rare to find a single credit union with a footprint big enough to mount an effective campaign for the mindshare of consumers when faced with competitors such as Commerce Bank, Bank of America, Wells Fargo or Washington Mutual. Given this reality, we are witnessing the consolidation of the credit union field through mergers.
But as we know from many studies in other industries, mergers and acquisitions are fraught with challenges and myriad unexpected consequences. At best the honeymoon is short lived, and too often the marriage looks like an episode from MTV’s “Osbourne family.” Hilarious, just as long as you are not part of the madness! What have we learned from our work with credit unions, many of which have undergone or are undergoing such mergers? Below we discuss the “seven golden rules” for boards and credit unions who are considering a merger as part of their overall strategy. These “simple rules” should help credit unions, and managers in other industries, better manage the complexities associated with the merger process.
1. Know thyself (and the reasons for a merger)
The Ancients considered knowing oneself to be one of the greatest virtues. Only when we have a firm understanding of our current capabilities and values can we make sound decisions regarding the future. Overconfidence and an unwillingness to discuss the skeletons in the closet will hamper any effort to expand the reach of the credit union. This self-knowledge is not limited to the architecture of the firm, but includes an understanding of the various futures the credit union may face (“What if” scenarios of the state of the industry), as well as the marketplace in which the credit union operates.
In addition, you need a detailed understanding of the pillars of your current success. These core competencies are the discriminating capabilities that give the firm a competitive advantage over the competition. Core competencies are not assets which can be bought or sold, but rather the organizational ability to do something unique that is hard to imitate, rare, while adding value to the members. These competencies should be organizationally rooted as opposed to residing with a handful of individuals (who may at any time walk out the door). Above all, they should provide an advantage over competitors.
“Know thyself” also involves knowing what your risk tolerance is and what your capability is to take on new ventures. On paper, without actual money at stake, some people are willing to dare anything, but strapped into the harness of a bungee cord you will soon find out how much you truly enjoy “living dangerously.”
2. Know where you are going
The oft-repeated line attributed to Wayne Gretzky, “I skate to where the puck will be” may have become a tired cliché, but the message remains true. Winners know what success looks like in the future. This ability to identify “Key Success Factors” distinguishes them from the losers, as well as the rest of the pack. Winning companies have at least a rudimentary notion of the capabilities (not every operational detail, but the big picture) needed to be successful in the future across a variety of possible futures focusing on one or more strategic segments. Once your organization has a clear understanding of the necessary array of future capabilities and possesses, above all, the ability to read changes in the external environment, you will be able to define a clear and compelling vision for your future as well as that of the merged organization. In this case, the vision is to attain the identified future capabilities, building on your current set of competencies and strategies that will let you bridge the gap between today and tomorrow as well as ways to deploy these new competencies. “Self knowledge” and a dynamic understanding of future capabilities are the bedrock of a strong organization.
3. Know the other
A third critical rule for mergers and acquisitions is to identify the capabilities and characteristics of a good merger candidate. The inherent qualities of the “object of your desire” are not enough to make them a high potential for your merger strategies. In other words, looks may be deceiving. The mere fact that the other credit union has a desirable name, many members, and substantial assets may not be enough for a good marriage. You have to see if the capabilities of the other organization complement yours or whether the candidate offers you an opportunity to enter an untapped market without too much downside (hidden expenses, problematic balance sheets, etc). If you are simply absorbing an organization because you can spread your field of membership or because they have a few prize locations you may be less concerned about knowing the other party, since you will be digesting more than incorporating their business. But with mergers of larger organizations, it is critical that the abilities of the acquired company either enhance or complement the capabilities and resources of the acquiring firm. In any case, you need to analyze your suitor rigorous to avoid falling in love “at first sight.”
4. Know the process
Mergers often begin at the personal level. Individual CEOs or Chairs discuss the need for expanding scale and/or scope or both. They soon realize, often to their own surprise, how much their organizations have in common and how common their needs are. That is the easy part. What is hard is to write down -- yes put it in writing -- mutual expectations, what both organizations will contribute with regard to financial, personnel and other resources. What are the immediate expectations, what will be accomplished by six months, twelve months and eighteen months? At what cost? And, by the way, how will each party be able to make sure that the other side sticks to the original agreement?
Checklists, flow charts and other tools all help to make explicit what too often remains below the surface, not to emerge until it becomes the tip of the iceberg aiming to sink the entire merger undertaking. Establishing an explicit process that involves all aspects of the organization including resource requirements, capital investments, personnel and budgets provides a good start. Not every detail needs to be worked out in advance, but what is needed is a clear division of labor, with metrics, timetables and champions. Clarity and accountability are critical at this stage.
5. Monitor (and monitor some more)
You have done your homework. You understand what it takes to win and have figured out what an ideal merger partner might look like. The next step is to start monitoring the activities and moves of other players in your chosen market including the other credit unions. Where is everyone heading and is anyone going your way? You also have to monitor the external environment for clues as to how the marketplace is evolving so that you can time your merger move. If the market is evolving quickly, outstripping you ability to serve it, then you have to accelerate your search and find the right merger partner before someone else does. We also have to carefully examine whether the assumptions that were used during the original process still hold sway – assumptions about the external environment, as well as the industry, marketplace, degree of competition, etc. Having a “prepared mind” helps you execute faster, and your monitoring capability is crucial to making sure your mind is prepared at the outset and for the inevitable surprises along the way.
6. Build bridges through dialog
Once you are ready to merge, you have to start building bridges between the two organizations. These so-called “soft” issues are where many mergers break down. As Howard Perlmutter, Professor Emeritus of Management at Wharton School, advises “you need to build a constructive dialog” between the employees, management and the boards of the two merging partners. In the words of Professor Perlmutter, a constructive, “deep dialog” helps you accept and bridge differences, develop relationships based on mutual trust and respect, and band together to build the new organization. After all, the reason to merge in the first place was to become a winner by combining the capabilities of two complementary organizations. During the merger process, you have to be diligent in preserving these capabilities by building bridges among the employees of the two organizations. If you don’t build these bridges, the merged organizations may actually turn out to less than the sum of its parts, effectively destroying the very reason for the merger.
7. Sustain and inspire change
So you have bridged the differences and banded together and are now ready to tackle the competitive realities out there. The combined organization has greater capabilities and resources, but to win you have to make sure that the new organization can sustain change. Should the new credit union do things the same way you did before? The answer is oftentimes “no.” As Albert Einstein once said, “Humans cannot solve future problems with today’s mentality (and)… they cannot solve problems with the same mentality that created them.” Change is therefore required and for change to be sustained you need to 1) have a shared vision, 2) have urgency to change, 3) have the capacity to change, and 4) identify actionable first steps. All these conditions matter. If change cannot be sustained the merged organization might revert back to its past behaviors, missing on the opportunity to build a lasting and great institution capable of serving its members in the years to come.
Conclusion
While this article has focused on a rather unique industry, credit unions, we would argue that these “golden rules” for a successful merger processes are relevant to many other industries. The importance of understanding the pillars of your own success as well what the future capabilities of a winner will be, are critical elements for any organization’s strategic IQ. The ability to analyze and critique a potential merger candidate requires constraint and realism as well as the ability to see the potential in joining forces. To avoid the trap of “believing your own stories,” the real work begins after the initial steps of identifying merger candidates, understanding the process and monitoring at the merger and the industry. The devil is in the details, but even these are not static.
Finally, a successful merger is not brought about by the combining of balance sheets and income statements. Successful mergers are the result of a relentlessly communicated vision of how the combined organization provides added value to all stakeholders, not the least for the employees who have to make it all happen. Mergers, especially of large organizations have received bad press in recent years and are often held out as examples of shareholder value destruction. Nevertheless, some mergers are successful. The lessons above are some of the mindsets and approaches that separate the winners from the losers. With the proper eye for detail and a carefully managed, transparent process, organizations can use mergers to drive growth and value for all their stakeholders.
For recent publications on this topic see:
Harding, David and Sam Rovit (2004). Mastering the Merger: Four Critical Decisions That Make or Break the Deal. Boston, MA, HBS Press Book.
For a useful textbook on this topic see:
Patrick A. Gaughan (2002). Mergers, Acquisitions, and Corporate Restructurings, 3rd Edition. NY, John Wiley & Sons.
Deans, Graeme K., Fritz Kroeger, and Stefan Zeisel (2003). Winning the Merger Endgame: A Playbook for Profiting From Industry Consolidation. NY, McGraw Hill.
Bamford, James, David Ernst, and David G. Fubini (2004). "Launching a World-Class Joint Venture," Feb 1, 2004, Harvard Business Review. Boston, MA, Harvard Business School Press.
