In the past month I was part of a LinkedIn email string concerning the announced proposed voluntary merger, sometime in 2021, of the two large Southern California credit unions, Xceed Financial Credit Union and Kinecta Federal Credit Union. According to news releases, the $900 million Xceed Financial will be absorbed by the $5 billion Kinecta. Some will remember that Kinecta was formerly know as Hughes Aircraft Federal and Xceed Financial was originally known as the Scientific Data Systems but shortly later became Xerox FCU.
The email string was a vigorous debate about the many circumstances surrounding the business conditions and agreements common to any merger and the role of management and volunteers, or otherwise known as “Follow the Money.”
Much can be said about that, but I want to talk about one part of any voluntary merger that is seldom mentioned, discussed or made available for extensive and broad member evaluation: what happens to the merging credit union’s capital?
Easy, you say. It becomes part of the surviving credit union’s balance sheet. In this case Xceed’s $95M of members’ equity is absorbed into the members’ equity account of Kinecta, currently about $400M. The post-merger capital of the combined credit unions will then approach $500M.
Is that a good, bad or neutral event for the members of Xceed? Has anybody asked them? I understand there must be a member vote, but would anybody even be talking about the other issues of merger, like executive and board comp, board positions, branch locations, real or imagined economies of scale, etc. if the first thing evaluated was the disposition of Xceed’s members’ equity?
What about that $95M of capital built since 1964 by the retained earnings of generations of the Scientific Data Systems and Xerox common bond? Can it so easily be handed over to Kinecta, never again to be separately identified as the legacy of Xceed’s owners/members? Doesn’t Xceed FCU have a current and future market value represented by its 50,000 members, its balance sheet and its off balance sheet products and services? Shouldn’t Xceed members realize some direct remuneration for that value, beyond post merger membership in Kinecta FCU?
I certainly understand all of the promised new advantages, both real and perceived, for former Xceed members. But doesn’t it sort of seem like those same Xceed members are paying $95M of their capital for the privilege to now become members of Kinecta? Are they getting their money’s worth, or is Kinecta getting the real deal by increasing their equity by 25%? Additionally, both credit unions have significant wealth management programs–what about the sale value of Xceed’s book of business?
I ask one important question of ethical concern: has the Xceed Board asked the owners if they would prefer a distribution of their $95M as an alternative to continuing as an ongoing concern or merging into Kinecta? After all, somebody has decided that a merger is better than to continue on as a financially viable and unique credit union with a strong single employer history. Would the pre-merger distribution of this generational capital to Xceed members as of some date certain muck up the merger? Would Kinecta still be as enthusiastic about serving this group of 50,000 members?