By Tom Randle, CCE
According to WOCCU, at the peak in 1969, there were 23,900 U.S. credit unions. Today, roughly a third remain—and mergers reduce the ranks almost daily.
Mergers often come about because a credit union CEO is retiring, the membership is demanding more, and the board, often long-tenured and tired of the responsibility, sees an opportunity to provide more to the membership, and not conduct a search.
Today, many mergers are also initiated by NCUA. Whether that is a knee-jerk reaction to the economic downturn, or to protect the share insurance fund, or some misguided directive from the agency, it is nonetheless, a cause for the disappearance of credit unions. Problem case officers are quick to suggest merger to a credit union and its board. There is denial of assistance, and often no discussion of the consequences of a merger on staff and members.
(It is ironic that as the number of credit unions has decreased, NCUA has increased the number of examiners and their salaries, while subtly suggesting that credit unions reduce employees, benefits and salaries. You may soon have a one-to-one relationship with an examiner as the number of credit unions continues to decline, but that's a topic for a separate post!)
Still, mergers as a part of a growth strategy are appropriate. For this reason, your plans should address your board's position on mergers, and a merger that strengthens your field of membership and is a good fit culturally, has to be on the table. Failure to engage your board now—so that when opportunity knocks you are ready to answer—may leave you wondering what happened, and why.
While mergers aren't inherently bad, most ultimately don't add value to companies, and even end up causing serious damage. According to Wharton accounting professor Robert Holthausen, who teaches courses on M&A strategy, researchers estimate the range for failure is 50-80 percent.
Management professor Martin Sikora, editor of Mergers & Acquisitions: The Dealmaker's Journal, agrees. "Companies merge and end up doing business on a larger scale, with increased economic power," Sikora says. "But the important questions are whether or not they gained competitive advantage or increased market power."
Wharton management professor Harbir Singh says the crucial distinguishing factor between merger success and failure is a sense of objectivity on the part of executives—a "realistic outlook" that needs to be maintained from the initial transaction through the entire integration. The danger, it seems, is when executives "fall in love" with the idea of the acquisition, wanting it to work no matter what the cost.
"Look, company A buying company B is really buying people," Sikora says. Negative outcomes—such as layoffs—are "invariable" and "must be handled humanely." Sikora also advocates immediate and clear communication. "You need to create a good impression. Good employees will quit if they feel their fellow workers are treated poorly."
Losing good employees is part of what a colleague of Sikora's refers to as "merger syndrome." "There is a natural distrust of the acquiring company, which leads to the development of fear and morale issues," he says. For this reason, people will often leave post merger, even when they have been treated well. Likewise, he notes that acquiring companies need to be aware of a "conquering army mentality." "If one company is acquiring another, there needs to be some realization that the employees of the target company make it what it is."
Those employees are part of the organization's culture, and determining that the two cultures are compatible is often overlooked, unverified, even ignored. How many credit union mergers have come about because two CEOs played golf and decided their respective organizations were alike and the cultures were a match?
For a more scientific look at organizational fit, you may use an assessment instrument, such as the Data Indicating Alignment of Organizational Goals (D.I.AL.O.G.), an instrument administered by the Resource Associates Corporation. It provides an organization's leadership with hard data as to where there are "disconnects" within the organization affecting results.
It is based on the National Institute of Standards & Technology's Seven Elements of Performance Excellence—because we understand that the true source of an organization's strength lies in its ability to manage the interrelationships of its systems. For example, having strong R&D and marketing departments is of little value if they are unable or unwilling to work together. The results will be unwanted products and adversarial relationships that work to the detriment of loyal customers and the bottom line.
Our experience also indicates that the more aligned an organization's systems are with the strategy and mission, the more successful it will be as measured by employee morale, productivity, customer loyalty, share of market and profitability.
The seven categories are:
- leadership
- strategic planning,
- customer and market focus,
- measurement, analysis, and knowledge management,
- workforce focus,
- process management, and
- results.
D.I.AL.O.G. responses from a cross-section of an organization produce a clear picture showing areas of alignment (strengths) and misalignment (opportunity). As such, this instrument becomes a powerful organizational development, strategic, and tactical leadership tool, providing valid information about where to best focus resources to maximize results.
Aligned values are also key in mergers. Does the surviving credit union share the values of the merging credit union? Everyone has their own unique mix of personal drivers and motivators. Understanding what really drives a person (organization) is crucial. A credit union's culture flows from the top down.
While values may sound difficult to quantify, the Values Index, developed by Dr. Eduard Spranger and Dr. Gordon Allport, is fully validated and exceeds standards set by the EEOC for validity and reliability. This instrument helps to ensure that optimal motivation, passion and drive are created to achieve the highest levels of personal and professional success.
What happens when there isn't a match? Be aware of the people. Everything we do has an impact on the entire organization. Loss of good staff and runoff of thousands of members are likely if the cultures are dissimilar. By doing culture and values assessments as part of merger due diligence—just as you will for the financials and goodwill evaluations—you will self-discover any gaps, and perhaps avoid "falling in love" with the idea of the acquisition that just doesn't fit.
Tom Randle, CCE, is president of KES Group, LLC. Tom is certified to administer the Values Index, DISC Index, and D.I.A.L.O.G. As a credit union CEO for 25 years, he participated in five mergers.
