In a new twist on conversions, Nationwide FCU ($587M, OH) announced last week that it would be acquired by a bank created by its sponsor, insurer Nationwide. The newly formed Nationwide Bank will pay $79 million for the credit union, representing 1.25 times book value.
On the plus side, this appears to be a clean deal. If approved, the credit union's capital will be paid out to members and there are no signs of insider enrichment. Furthermore, the credit union has posted an abundance of well-written information about the proposed sale on its website.
Still a Problematic Conversion
The materials posted on the credit union's website include a press release, a letter from the CEO to members, and a list of 19 FAQs. After reading through the materials, however, the following issues remain:
- The arbitrariness of the $79 million distribution. Members over age 18 with deposit balances on March 31, 2006 will receive a payment of about 115% of their actual balance. This ''snapshot'' doesn't capture each member's true contribution to the credit union's capital and success and will result in some inequity among members.
- The size of the premium to book value. Members have no way to determine whether the 25 percent premium to capital is fair or not. (It appears that Nationwide Bank is getting a bargain, considering that the average price/book ratio for bank and thrift acquisition is 2.04 times book value.)
- The logic that equates a one-time minor payment with ''protection of member value'' post-acquisition. Unless Nationwide Bank proposes to maintain dual pricing—one tier for former credit union members and another pricier tier for new bank customers—it is far from certain that former members will continue to enjoy the economic advantages more typical of credit unions.
- Calling it a ''merger.'' It is in fact an acquisition, as the credit union will cease to exist.
- Citing the strategic importance to Nationwide (the insurer) of creating the bank as the primary reason the merger is being proposed.
In fact, this last issue raises one more concern—did Nationwide as sponsor twist the board and management's arm into delivering up its members and capital to give the new for-profit bank a head start? This is not explicitly stated, but reading between the lines, seems to be the most likely explanation for the transaction. It would also explain why Nationwide FCU took pains to note that its disinterested (i.e. no longer employed by Nationwide) directors comprised the special board committee that considered the acquisition proposal.
If this is indeed the case, then the transaction is doubly regrettable for the credit union's members: not only will they have lost their credit union, but they will have lost it because their employer has made clear that its business goals are more important than employees’ economic freedom and ownership interests.