7 Secrets For Merger Success

These best practices will ensure your next merger won’t be your last.

With six mergers completed since 2009 and three more on the immediate horizon,Credit Union of Southern California($781.8M, Whittier, CA) commonly referred to as CU SoCal attributes just over half of its branch footprint and about 70% of growth achieved in the past five years to merger activity.

On the opposite side of the country,The Summit Federal Credit Union ($723.7M, Rochester, NY) averaged close to one merger a year between 2003 and 2011, increasingits assets by more than $445 million and adding 12 branches in three regional markets beyond its original Rochester and Seneca Falls footprint.

Despite the prevalence of this activity, neither of these institutions has ever actively sought out any merger partner. Instead, they’ve been responding to increased demand from small-to-mid-sized credit unions for cooperative alliances, both forsurvival and for the enhanced economies of scale a bigger sandbox can provide.

There’s no doubt that mergers can boost key metrics in a short amount of time, but according to these two cooperatives, those who pursue such opportunities out of a one-sided growth agenda usually falter as a result.

We weigh every merger request we receive according to a number of factors, but it all boils down to two key questions: Does the merger ensure the financial safety and soundness of our credit union, and does it provide value to the members of bothorganizations? says CU SoCal CEO Dave Gunderson.

We’re not in business to put other credit unions out of business, says Michael Vadala, CEO of The Summit. But the industry is changing and in those cases where a merger is the right answer, you need to know how to do it anddo it well.

Below, both credit unions share seven key ways to stand out as an attractive merger partner and ensure those alliances don’t just benefit one party but rather strengthen the entire cooperative system.

1. Timing Matters

Although neither CU SoCal nor The Summit solicits mergers, for those cooperatives doing the soliciting timing is everything.

The credit unions that have approached us are typically well-capitalized, but increasing competitiveness in financial services means that when they look five to 10 years down the road, that might not be the case, Gunderson says.

Those with more immediate financial shortfalls, regulator pressures, a lack of liquidity for loans, or other issues they cannot solve on their own should look at pursuing these opportunities even earlier, Vadala says.

We’ve walked away from mergers because of issues that, if the credit union had sought help three years earlier, we could have worked with and absorbed, he adds. It makes more sense to merge in a position of strength so thatyou can choose the right partner rather than having one selected for you by regulators later on.

2. Look Beyond The Balance Sheet

Succession concerns often drive current merger activity, particularly for smaller credit unions that historically were guided by one influential figure.

Several institutions we merged with had leaders who were two to four years from retirement and the boards were struggling to find good replacements for them, Gunderson says.

Likewise, changes in regional population or the end of a relationship with a select employee group can also play a role.

In CU SoCal’s case, every single credit union it merged with had faced negative membership growth for at least five years prior, leaving leadership rightfully concerned about the value it could provide members as a standalone organization.

3. Know When To Say No

Timing can be critical for those who wish to or need to merge, but both CU SoCal and The Summit warn against letting it cloud your judgment about who would be a good merger partner or prompt you to rush the due diligence process.

In fact, CU SoCal has turned down three potential mergers in the past five years, with The Summit turning down five mergers over the past decade. Yet in several of those cases, the credit unions were able to offer additional assistance such as sendingemployees over temporarily to help their peers address certain issues, identifying other cooperatives that could offer them a better fit as a merger partner, or in The Summit’s case paying association dues to get them accessto additional expertise.

In one instance, buying out all of the existing vendor contracts for an otherwise attractive merger partner would have cost so much we would have had to let half of their workforce go to make it work financially, Vadala says. We obviouslydidn’t want to do that, so we helped them find someone else with the same vendor partners so they could do that merger and keep all of their employees as well.

4. Make Sure The Members Believe In It

Sometimes a merger that looks good on paper just doesn’t resonate with the membership, either because the potential value was not communicated or is not as significant as the deal’s architects believe. That’s why CU SoCal pays closeattention to its members’ voting trends to verify that it is making the right merger move.

We’re looking at three mergers within the next year, with South Western Federal Credit Union, Interstate Federal Credit Union, and California Center Credit Union, Gunderson says. And for every membership vote we’ve had,there has been between a 90% and 95% approval rating.

5. Small Mergers Matter Just As Much As Big Ones

At CU SoCal, the smallest merger in its history was just $1.8 million in assets. But all of its combined historic merger activity would represent an institution with roughly $460 million in assets and including three pending mergers currently in the works 50,000 members. That means executing this activity successfully is every bit as important for CU SoCal as it would be for a cooperative undergoing a merger of equals.

Mergers are also a referral business, according to these credit unions, and executives who treat this activity as mere acquisitions to be done as cheaply as possible won’t have the chance to make the same mistake twice.

These institutions aren’t just handing you the keys, Vadala says. They’re giving you everything they’ve worked for, and they have an expectation that you carry that forward with respect and dignity for their members.If you can’t do that, you shouldn’t do a merger.

6. Momentum Is A Valuable Asset

Because neither CU SoCal nor The Summit can guarantee when the right fit will come along, they’ve adopted an operational readiness that allows them to execute mergers effectively without impeding normal day-to-day operations.

We’ve built up expertise with each merger and our low turnover at the executive level has helped us retain this growing knowledge base, says Laurie Baker, The Summit’s chief operating officer. We’ve also created our own by-department checklists with corresponding timelines that can be used to quickly reorganize employee efforts whenever needed.

During normal operations at CU SoCal, the credit union’s 10-person partnership team focuses exclusively on their main nine-to-five job duties. But when a merger is approved, those responsibilities are rolled back allowing the group plus three orfour representatives from the acquired institution to manage the transition.

Another important differentiator has been the credit union’s wholly owned technology credit union service organization, CU SoCal Partners, which was created in 2007 and includes a few individuals who split their time between CUSO work and servingon the credit union’s larger IT team, Gunderson says.

So far, this CUSO has assisted CU SoCal with six mergers, including a 2012 merger involving three separate credit unions with a combined $122 million in assets that was completed in just two months. The CUSO has even helped facilitate successful mergersfor other cooperatives.

7. Mergers Aren’t Over After They’re Finalized

Assimilation of incoming employees is always a top concern with mergers, so institutions with developed strategies in this regard often come out ahead as the most desirable merger partners.

For example, at CU SoCal, board members from each merged organization form an advisory board that meets monthly with executives during the height of activity and then quarterly after the dust has settled. In addition, three of the nine members currentlyserving on its corporate board came from partnering organizations.

CU SoCal also has been able to retain every single executive and employee from its merged institutions, says Michelle Hunter, the credit union’s chief marketing officer, but retention is only part of the goal.

We want to make sure we are utilizing the best practices and expertise they can offer, which in the past has ranged from document imaging to business development, she says. We also want to leverage the fact they are now part of alarger organization by creating more diverse career paths and advancement opportunities.

February 23, 2015

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