We've been talking about the principal problem with the escalating pace and size of credit union mergers [7/21 post - link]:
In general, the merger agreements approved by the boards of directors of credit unions merging (selling) to other credit unions defy economic reason and are not in the financial best interests of the member-owners - the folks those individual board members are elected to represent.
As such those merger agreements appear to be a clear breach of fiduciary responsibility.
The proposed merger example given in the 7/21 post was between two Massachusetts CUs: Brightbridge CU and AAHRA CU. You'll note that a much better and more financially responsible proposal would be to payout $2k to each of the 6,000 AARHA members in connection with the merger. The AARHA members are appropriately rewarded for the success of their credit union and Brightbridge benefits from an expanded geographic footprint, 6,000 new members, 4 more branches, and gains @$150 million in assets.
Nothing unusual about the proposal - in fact it mimics "the industry standard" for mergers as outlined by the National Credit Union Administration (NCUA).
Many financial speculators and predators will enjoy "a big unearned payday" if merging credit union members - like those at AARHA - continue to receive less than their fair share of the credit union's member equity.
"But the NCUA and State regulators say it's OK?" Do they?
“A body of men holding themselves accountable to nobody ought not to be trusted by anybody.”
ReplyDelete-Thomas Paine
Wonder how this merger in Massachusetts will play out? Bet the members get $0 and the execs all get some megabucks. The formal details aren't yet public?
ReplyDeleteMembers will still have a claim to the capital if the combined org, even if no one writes them a check, and they get to be a member.
ReplyDelete7:47am You miss the obvious. The members of the merging credit union would prefer actually receive the past reserves to which they are entitled... in all cases.
DeleteThey then become new members of the continuing credit union... like any other new members.
You would force them to in effect pay $2k to join the continuing credit union.
Disagree? Then let the merging credit union members vote on the choice. Democracy will find the right answer.
Do you not agree that as member owners of the new combined org, that prior AARHA members a claim on the combined capital of the new org?
DeleteSure, of course they’d want 2k and then a claim on the equity of the new org. Payout AAHRA 2.000, no more equity. New org still has 220 million equity but 121,000 members or $1,818 per member. In your scenario AARHA got 3,800 per member..that’s not how it works, look at from BB’s side. Before the merger, they had 1,913 per member. AAHRA members come over with no equity, but assets that have to have capital held against. Capital gets diluted and now it’s down to 1,818 to member. BB members lose. They are the ones that lose capital in your scenario. Suppose they’d vote for that?
That’s why no CU merger ever has done the way atre suggesting, and never will. Same for any other company or industry. Company buys another for stock - shareholders get equity in new company. Company buys another for cash , they’re out, with no stock in new combined company.
I definitely would love to be an AAHRA member in your fantasy world.
Do you not agree that as member owners of the new combined org, that prior AARHA members a claim on the combined capital of the new org?
DeleteYes of course, just like any new member that joins Brightbridge next week.
DeleteSure, of course they’d want 2k and then a claim on the equity of the new org. Payout AAHRA 2.000, no more equity. New org still has 220 million equity but 121,000 members or $1,818 per member. In your scenario AARHA got 3,800 per member..that’s not how it works, look at from BB’s side. Before the merger, they had 1,913 per member.
Delete9:57am This is a prime example of the critique from folks who say member-owners can no longer afford to be led by "amateur capitalists"!
DeleteThe commenter doesn't seem to understand the true value of the AARHA credit union (the branches, the $150 million in assets, the zero acquisition cost of 6,000 proven member relationships).
No concept at all evidently of the basic economic principles of "present and future value" in valuing the worth of a business.
Doesn't seem to even know that most professionally led financial institutions are selling for 1.5X to 2x book value these days.
Let the merging members get fair value for their equity... it's called due diligence, fiduciary responsibility.
That’s why no CU merger ever has done the way you are suggesting, and never will. Same for any other company or industry. Company buys another for stock - shareholders get equity in new company. Company buys another for cash , they’re out, with no stock in new combined company.
Delete2:35pm Living in the past and land of la-la. Times have changed and credit union member-owners will demand to receive fair value. Every merging credit union should demand that their board do the required due diligence.
DeleteYou seem to overlook that after receiving the fair value payout, when the merging members' share accounts are transferred; they automatically become a member of the surviving credit union.
DeleteSince you're the apparent expert. Do you not understand that the merged credit union's equity will still exist in the new combined org. How do you not get that?
2:47 pm Don't need to be an expert to do the math. 1) Accept $2k in cash and become a member of the surviving credit union or 2) just become a member of the surviving credit union.
DeleteBut lets not argue let the members of the merging credit union decide... suspect their judgment is sound, they'll get it.
And in scenario #2, their capital goes with them to the new org as the balance sheets combine. You act like it just goes away if they don’t get a cash payout. Simple concept. It’s a merger, not a sale.
Delete4:36pm Sorry nobody is buying that option. It is a figment of "fantasy land merger theory" to try to imply a member is better off not taking the $2k in exchange for their merging credit union ownership rights.
DeleteBut again lets not argue, in the merger proposal vote give the merging members the choice to 1) merge 2) don't merge, 3) merge and receive $2k... that's truely fair isn't it?
If a member wants to invest their $2k worth of member equity in the new credit union so be it.
Fantasy investing or the real thing?
ReplyDeleteI definitely would love to be an AAHRA member in your fantasy world.
2:59pm Glad you agree that you and every AARHA member would prefer to receive the check for $2k. Don't think anyone on the planet would disagree with you... nor choose differently.
DeleteThe whole point of the "Jeopardy" posts is to acknowledge that when CUs become "commercialized" then we have entered the "real" world of economic rigor ... and have left the cooperative "fantasy" land.
Members - and directors especially - must now demand fair value for the credit unions they own. Giving away a highly valueable financial business reeks of fiduciary irresponsibility.
3:09. Credit unions aren’t given away in a merger situation. That makes no sense.
DeleteIn CU mergers, the assets are marked to market, the liabilities are marked, and the difference is recorded as an income gain - which is net income = capital. If the capital of the merger cu is paid out to members, cash (assets) is reduced by the proportional amount.
DeleteThat's right and the substantial recorded gain - which is the norm! - plus the reserves from the merger should be disbursed to the prior member-owners, who accumulated it.. The surviving credit union still receives a free credit union.
DeleteI would vote that way. No dispute there. Disagreement is your scenario has no basis in practical reality. But hey, find a credit union willing to take on assets, assume liabilities, but not get the capital with it, then more power to you. It has never happened and never will.
Delete4:47pm Believe you've got that wrong.
Delete8:21pm Thanks for agreeing. Hope we all understand that credit union directors that want to avoid financial liability and perform actual due diligence should make sure all interested other credit unions have a chance "to bid".
ReplyDeleteGiving away credit unions is financially insane... and there will be many other interested bidders nationwide as "merger mania" rolls forward.
All boards should take note of the new liability... and responsibility.