By Franck Schuurmans, Ph.D., CAE, & Michael Mavaddat
Mergers, acquisitions and bank conversions are experiencing a dramatic rise. Whether the trickle of conversions to bank charters will change into a torrent is still uncertain, but that the consolidation of the industry will continue to take place at an accelerated pace appears to be a trend. In other words, we need to get used to it! But as we know from other industries, consolidation through mergers is fraught with challenges and myriad unexpected consequences. At best the honeymoon is short lived. 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! To help avoid mismatches and bad prenuptial agreements, here are seven golden rules for credit unions considering a merger as part of their overall strategy.
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 solid understanding of our firm’s current capabilities can we make decisions regarding its future strategy and “desired abilities.” Flattering, overconfidence and an unwillingness to discuss the skeletons in the closet will hamper any effort to expand the credit union’s reach. 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, 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, or core competencies. “Know thyself” also involves knowing what your risk tolerance is and what your willingness and ability are to take on new ventures. On paper and 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 how much you truly enjoy “living dangerously.”
Once you have determined your true core capabilities and competencies, you should do a little more homework to find out what it takes to “succeed and win” in your chosen market—a combination of resources and capabilities. How much overlap is there between your core competencies and resources and the key ingredients for winning? Chances are you will find you don’t have all the necessary ingredients to win. At this juncture your choices are: 1) Grow organically or 2) Find a partner with the right resources and capabilities and merge with them. If you choose to pursue option 2, then you must make sure everyone—your board, management team, employees—understands the right reasons for merging.
2. Oh, Brother, where art thou going? The oft repeated line attributed to Wayne Gretzky, “I skate where the puck will be,” may have become a tired cliché, but the message remains true. Winners know what future success looks like. Winning companies have at least a solid understanding of the capabilities needed to be successful in a variety of possible futures, can articulate a compelling vision for their organization and possess a plan that will let them bridge the gap between today and tomorrow.
3. Know the other Consider carefully the capabilities and characteristics of a good merger candidate. The mere fact that the other credit union has a desirable name, many members, and lots of assets is not enough to make 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 down side (hidden expenses, problematic balance sheets, etc.). If you are simply absorbing an organization because you can spread your field of membership or because it has a few prize locations, you may be less concerned about knowing the other party. With mergers of larger organizations, however, it is critical that the abilities of the acquired company either enhance or complement the strengths of the acquiring firm. In any case you need to analyze your suitor with care and 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 and 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 in writing, are the mutual expectations and 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, 12 months and 18 months and at what cost? How will both parties be able to make sure the other side sticks to the original agreement? 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. And, oh yes, before we forget it, holding each other mutually “accountable” for the success of the merger.
5. Monitor and monitor 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. Next step is to start monitoring the activities and moves of other players in your chosen market including other credit unions. Where is everyone heading and is anyone going your way? You have to also monitor the external environment for clues as to how the marketplace is evolving so you can time your merger. If the market is evolving quickly, outstripping your ability to serve, then you have to accelerate your search and find the right merger partner before someone else does. Having a “prepared mind” helps you execute faster.
6. Build bridges Once you are ready to merge, you have to start building bridges between the two organizations. As Howard Perlmutter, professor emeritus of management at the Wharton School, advises “You need to build a constructive dialog” between the employees, management and boards of the two merging partners. This 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 was to become a winner by combining the capabilities of two complementary organizations. These are the very capabilities that reside in groups of employees who until the merger were working in different, sometimes even competing, organizations. During the merger process you have to be diligent in preserving these capabilities by building bridges; otherwise you will effectively destroy the very reason for the merger.
7. Sustain and inspire change Once you have bridged the differences, you will be ready to tackle the competitive realities out there. The combined organization will have greater capabilities and resources, but to win you have to make sure the new organization can sustain change. 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 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.
Franck Schuurmans, Ph.D., CAE, and Michael Mavaddat, are with Decision Strategies International Inc., Conshohocken, Pa.
