In our inaugural episode of INTERSXCTIONS, we’re talking mergers and acquisitions with Michael Bell, Partner at Honigman, a business law firm focusing on more than 60 areas of industry-specific practice. Michael joins us as the Co-Chair of the Financial Institutions Practice Group at Honigman. He represents financial institutions throughout the United States and has completed over 35 M&A transactions in the past five years.
Q. Why should financial institutions consider an acquisition strategy?
Michael: 2022 will be the year of credit union acquisition and acquisition of banks. We’ve had some pretty busy years in this regard, but this year is the year. As far as strategy, there’s the question of why. Why would we do this or why are our peers doing this? I think we can really group that into a few main segments.
First, is geography. Credit unions have looked at geography to determine, is this the best way to enter a new space? Or, is it the best way to perhaps enhance existing space? My answer to both those questions for many, is yes.
We can also look at the “build or buy” question. What is the cost if we buy some dirt, build a building, and fill it up with members? How long does it take? When is its payback? Then, compare that with the strategy of, what does it cost if we buy an existing institution (buildings with customers), and when does that pay back? I’ll tell you that 100% of the time, it’s cheaper to buy and it gets paid back quicker.
Many credit unions are also thinking about these transactions for other reasons. One would be assets and liabilities. Depending upon your institution, this could definitely be about liquidity and deposit gathering. Or, in the converse, it could be about loans and assets. It could be about diversifying your lending, getting a new lending product, getting into a new line, or simply getting more of what you already have.
Finally, this can be about talent and capabilities. How do we grow our talent? How do we grow our capabilities? They can certainly try to hire and play the long game—or, they could acquire.
Q. Can you talk about the acquisition opportunities that exist out there?
Michael: Absolutely. So, we can think about it like bookends, per se. On the one side, you have what I call a whole bank acquisition: you can buy a whole bank and get the whole shooting match. Or, conversely, you could buy bank branches, like a mini bank deal.
Then, third—I’ve yet to coin a catchy term for this—but there’s kind of an everything else category. This is kind of a soup-to-nuts: investment businesses, insurance businesses, specialized lenders, mortgage originators, etc.
I had a client buy a real estate brokerage. This particular client already has mortgage lending that they do very well. It gets you your property and casualty insurance. They also have a title insurance product. Now they can say, “oh, by the way, we can buy and sell for you too.” As an asterisk to that, they’re going to rebate back some of the commission. So, it’s a massive win for the institution and it makes being a member extra relevant. That’s a huge giveback!
You can acquire anything, from a whole bank down to one person, or even a mortgage lending business or a real estate business. It really runs the gamut. You need to figure out strategically where in that menu it makes sense for you to execute.
I’ll add one more thing—and this is a very simple concept. When businesses sell, they’re gone. This isn’t a fire drill. My hair is not on fire. But I speak with urgency in that if you want to get in this business, get in sooner rather than later so you have more targets: more opportunities that you can execute on.
Q. How do financial institutions test the landscape in a new area?
Jim: One of the things that can be challenging is the integration of varying tech systems. Sometimes, you’ll have an organization that isn’t nearly as tech savvy as the other. Whoever the winning organization is, their systems are probably going to be the ones that carry over. What you don’t want to have happen is a reduction in capability.
If you don’t have things like online member onboarding, there’s an experience gap for members. We have data from our existing clients that backs up this idea that member growth, customer growth, loan deposit—all of those will be stymied by having friction in the process. Forcing consumers to go to an actual location to do business is a friction point. It doesn’t mean that branches are dead, because they’re not. What it means is that instead of saying “you can only do business during these hours,” you now allow someone to do business at a time of their choosing.
The other component that you have to look at is, what does the media landscape look like? You’re going to need to introduce yourself. For example, you might have to work to overtake an old brand and move on from it. Push out there all of the reasons why this is going to be beneficial to the community, to the new employees, to vendor partners, and to new membership.
Push out that new message of “this is the change,” and remember that change makes people nervous. You have to be very aggressive in showcasing why this change is positive. Members not only aren’t going to lose any of the things they love, they’re going to gain so much more from this. Use that to both protect against any member attrition and grow new membership.
Michael: When I think about these acquisition transactions, I believe there’s a magic moment just prior to closing that the acquirer can communicate to its future members. You have to be ready to act and act to ensure that these folks feel good. Then, we can grow wallet share and grow product per household.
Jim: Yeah! The challenging part here is that there’s only so much you can squeeze into that tight moment in time. We need to move from “this has now become this” to “getting rid of what was in the past and moving forward into the future.” The longer we’re dual branding, the longer we have competing brand messages.
There’s two very quick ways to start pushing that process, and they both wrap around retargeting. The first is utilizing the existing community bank site. What you can do is place targeting pixels on that site—that way, we know who the folks are who are going to that site. You can then take that targeting bucket and start pushing the right messaging to the right people, at the right time.
Secondarily, you can take all of the address information—the home addresses of all of those folks—and load them into an IP-based targeting system. Now, you can deliver messaging directly. You’re sequestering out the folks that need to hear that new message, while delivering relevant messaging to your existing membership. What you don’t want to do is intermix messaging.
Q. There are a lot of open CEO positions. Is this a signal for a good merger?
Michael: If someone asked me “what’s a key driver for creating a credit union merger” or “what’s a key driver for a bank to sell and be acquired by a credit union,” I would say that one of the consistent themes that has cropped up in the last two or three years is succession planning. A talent gap in the C-suite, in the management suites, or at the board levels. So, absolutely, more often than not in a credit union concept, succession planning or CEO retirements needs are driving these acquisition decisions.
One of the biggest reasons a small bank or community bank would sell or seek a buy partner would be because their management team is aging and they don’t have ready replacements—or their board is aging and they don’t have ready replacements.
That’s real. It’s absolutely accurate and it’s not going to get better. I don’t see some massive influx that’s going to change things, where everybody’s going to want to become a community bank president or everybody’s going to want to become a credit union CEO and they get older. This is here and it’s staying and it will continue to drive numbers in both sides, in both spaces, without question.
Q. Is a merger ever beneficial over an acquisition? A merger of equals?
Michael: If a credit union comes to me and says, “we want to grow non-organic,” and—just for perspective here, organic growth is kind of their current machine; introducing new products, new wells, new deposits—I would say to them, a complete non-organic plan or one that’s most likely to be successful is going to involve four things. If you’re serious about your non-organic growth, I think you have to be open to all opportunities:
- One, credit union to credit union mergers or combinations;
- Two, bank acquisitions;
- Three bank branch acquisitions;
- Four, all that other stuff, depending on your strategy.
A credit union combination is one that doesn’t involve the exchange of consideration. Money doesn’t change hands and it’s not about money. Where, on the acquisition side, it’s always about money. We’re selling. You’re buying. What are you paying? What are we accepting? It’s completely opposite.
I think both are needed because they both happen on different timelines and for slightly different reasons. Many of my most successful clients across the country, my most dynamic clients, are in both and are doing both.
Now, let me touch on mergers of equals (MOE).
A merger of equals is certainly a thing. In my opinion, that doesn’t mean you look at the assets and they have to be almost identical to be an MOE. I think MOEs are better-understood as equals in not just asset size, but in sophistication and presence. An MOE is really a joint collaboration where you’re going to see the end result exist on an almost equal combination of management boards, of products, of locations, etc.
They are, to me, the great white whale. They happen once or twice or three times a year. I love them. I wish they happened 20 times a year
Q. What makes an acquisition go smoothly? What derails one?
Jim: From the consumer point of view: communication, communication, communication. That’s what this all comes down to. The more that you can explain what’s happening, why it’s happening, why it matters, and how it’s going to benefit; that’s what we need to hit. It goes across the board with your current members, the new members who are coming in, the current employees, new employees, etc.
Communication is going to be very important from an internal standpoint. And remember, internal matters to external because all those folks that are part of this merger, they’re going to talk about the merger process, whether you like it or not: what it was like and how it made them feel. All this is going to inform sentiment that, for good or ill, is going to own the outward appearance of the internal communications.
And then, of course, there’s your external communication. That’s the exact same situation, where you’re going to have some folks that don’t know what’s going on. You’re going to have folks that didn’t even know that it happened the day that it happens. They’re going to be surprised when they finally learn about this. The thing to remember here is empathy. Have a team ready to deal with those situations quickly—I’m talking within 10 or 15 minutes of a possible negative experience floating out there, because the longer this stuff sits out there, the longer the narrative is “this has changed, it’s now different and I don’t like it.”
Just remember those two key words: communication and empathy.
Michael: It’s interesting because we’re dealing with entities that are regulated. There’s a time lapse here, such that the way these transactions work, we’re going to execute a binding agreement and then we’re going to have time elapse before we can close or before we close during that regulatory review period. So, the way I explain it to the credit unions is that there will come a time where we’ll sign our binding agreement and we go on divergent roads. I personally am going to handle the regulatory process: its review, the approval of actual closing, the logistical closing, all the legal documents. This is because the credit union has one job and they’re going to have—depending on what we’re buying, it could be as short as 30 days if it’s a unique business or as long as six to eight months, depending upon the whole bank scenario—to get ready for LD One. They need to be, essentially, entirely operational and focused.
Playing off what Jim said, there are multiple constituencies here. It’s current employees. It’s the new employees joining. That’s one constituency. There’s a community, whether it’s the community that you’re in or the community you’re going to. And then, of course, there’s the customers and the members.
These varying constituencies all have to be considered operationally, such that, from the day we sign and it’s real until the day we close—ranging 30 days to eight months or so, depending on when we’re ready to unlock the door on LD One—we need to deal with all three of those various groups and segments and things of that nature. There’s time; but in the end, there’s not much time. So, starting the day after we sign, it’s instant. It’s all about integration, operations, messaging, and really getting geared up so that we’re ready for day one; for opening day.
Q. What areas of financial branding are gaining a head of steam?
Michael: I’ll start by making an unequivocal statement that I think is very important: creating integrated mergers or acquisitions of credit unions (buying things) is truly relevant everywhere.
Markets where there are more small banks are going to be obviously more relevant than markets where there are a few small banks for acquisitions. In the credit union space, you can look at this kind of state-by-state and see there are some states with hundreds of credit unions, and there are some states with ten. So numerically, this will obviously happen more often where there are more. No question about it. But it’s relevant everywhere.
One space I think that credit unions can specifically capitalize on—or have a better chance to capitalize on—is the rural space. If you look across our country state-by-state, there’s perhaps less interest in rural areas in general when it comes to, as an example, banks trying to bank those spaces or to get into those markets.
Credit unions have a unique opportunity and ability to capitalize on membership in these rural areas, and serve these rural areas very well. Some of the most successful transactions I have seen have been credit unions acquiring some rural banks, and they have been able to capitalize and to assist those customers when they become members and offer more products—and, believe it or not, get membership gains in areas where people think it’s not worth banking.
People are everywhere, so I’ve really been interested in this rural focus, especially with technology. These people and areas need not be forgotten and can be served and serve successfully
Q. Is a rural bank acquisition part of an underserved market strategy?
Jim: Oh, absolutely. Rural areas still have access to heavy digitization. They might not have the fastest wired internet speeds, but they’re most likely going to have relatively decent mobile speeds. So, you’re going to be able to hit them across the spectrum in a far more cost-efficient way than utilizing, say, something like traditional radio or traditional television.
The reason why I say that is, both those things have high waste factors. That’s just one of the great downfalls of your traditional media model, especially when you move outside of densely populated areas. The media waste that you start seeing goes up dramatically. It’s about limiting that waste.
The issue with a lot of your more broadcast untargeted techniques is that they present the opportunity to appear to be cost-effective. But once you actually get down into the numbers, you start realizing that your actual acquisition costs, your targeting cost, your messaging costs—they all go through the roof in almost any situation that we’ve come across.
Now, that doesn’t mean traditional media doesn’t have a place. It does. It just comes down to a similar concept that you talked about in those four areas of growth. You have the merger of the credit union, the credit union buying a community bank, the credit union buying a branch, and you’ve got everything else they can do. It doesn’t mean they should do all of them; it probably means that one or two of them is going to be their sweet spot.
Media works the same way. You have so many options out there, from traditional media, to social, to OTT, to geographic targeting, to IP addressable targeting, to behavioral, to intent targeting. I mean, the list goes on and on and on. You can’t do all of it, and that’s one of the tripping points that we see more often than not: financial institutions try to take too few dollars and spread them across too many opportunities, thus gaining nowhere.
Q. What does the future look like for the financial industry?
Michael: I think that some unintended consequences of this highly regulated space, and the cost to be in this space, are that there’s a baseline size or scale that’s essentially required. Name an industry that has regulations and that, in and of itself, will cause the industry to have to be bigger or to scale. We will continue to see scale occurring: smaller players leaving in one form or another and players that are staying and growing. I think that doesn’t change.
Now, one thing that has not occurred recently—that perhaps will occur more—is this whole De Novo idea. So, De Novo banks or De Novo credit unions are those that are chartered or started new. That market kind of ebbs and flows, and if you look back over the last 10, 11, or 12 years since the Great Recession, that market died. The Great Recession is the place where that idea went to never live again, it seems. The regulators tightened that up, of course. Investors were like, “I’m not doing that.”
Now, there’s life. There’s a heartbeat there. If you look back, there’s been some De Novo credit unions and newly chartered credit unions. You’re hearing about it more. So perhaps that’s going to help balance out this scale thing we’re talking about. It will definitely not offset it; no way. But will it be a hedge to that? Sure. And perhaps it becomes more relevant if we can avoid another huge recession or downturn and give that industry or that piece of the industry a chance to breathe.
Q. These De Novo entities—are they starting up around a specific cause?
Michael: In the credit union world, I think you can De Novo any type of charter: literally federal, state, community, multiple seg, you name it. Now, if I think recently what I’ve seen in a De Novo credit union space, certainly there are some natural fits.
For example, one to serve a certain Native American tribe. This is a wonderful fit for De Novo: a credit union. Or, perhaps a certain underserved community or segment geographically. This is an area that’s a financial institution wasteland. There aren’t any. So, a community can come together and put in a De Novo credit union to serve that geography or that area of a state, county or city. That’s kind of the low hanging fruit.
I’ve definitely seen it professionally, too. Perhaps a group of doctors or a group of dentists would come together and think about chartering a new bank or a new credit union to serve that profession. That’s real. That makes sense. I think there’s a future in that.
Q. What’s the financial branding outlook for the coming years?
Jim: I think when you look at the scale issue, you also start seeing how maybe the overall industry is moving away from some of the original intent. Typically, you look at multiple common bonds, you look at seg. But I would actually suggest that the opposite is true from an opportunity standpoint. These mergers, the larger institutions, allow the true common bond to become the brand.
Instead of looking at the brand as something that’s just a name—something that’s just some logos and colors, and harkens back to 50 years ago (not saying you should throw away history)—look at your membership. Who do you serve? Who’s the right fit? Let the true culture of the credit union float to the top, become the brand, and connect with the people in the community that you want to connect with.
That is your common bond. That’s going to create a community, no matter if you’re a $500 million credit union or you’re a $2 billion and a $5 billion credit union that just merged. Both of those have the opportunity to build culture, to build community, and build that common bond through brand.
Q. Where can people learn more or find you guys if they have questions?
Michael: My law firm has a website, but I’m pretty active on LinkedIn. Whenever I speak or meet somebody new, I encourage them to seek me out on LinkedIn. It’s where I really prefer to do a lot of communicating, whether it’s a breaking transaction or it’s some kind of content that we’re pushing out that’s relevant to a recent regulatory change or a new opportunity. I really leverage LinkedIn as the preferred tool to learn more about me and for me to push things out to you and learn more about you. I’m also always available via email too, which is all over LinkedIn and on my website.
Jim: LinkedIn is a great place to catch me, whether you want some tips on coffee cake or you’re looking for some nice haikus every Monday. You can also catch us at tunetoJXM.com, and you can reach me at [email protected].