Abrupt Executive Exit Highlights Challenges with Mergers of Equals

The resurgence of mergers of equals has hit its first speed bump.

Mergers of equals often get a bad rap. The deals typically look stellar on paper, but often falter during execution because of enormous social issues tied to bringing like-sized companies together.

A need for scale has encouraged a handful of such deals in the last 18 months. Still, the common zinger overheard at investor conferences and cocktail hours is that one company inevitably ends up being "just a little bit more equal than the other."

United Financial Bancorp (UBNK) in Glastonbury, Conn., is fueling the debate after announcing the resignation of Jeffrey Sullivan less than six weeks after United, where Sullivan was chief operating officer, merged with Rockville Financial. Sullivan, briefly the combined company's president, was surrounded by members of Rockville's management team, including Chief Executive Bill Crawford.

"I'm not surprised he left, I'm just surprised by how soon it happened," says Matthew Breese, an analyst at Sterne Agee. "There has been a culture change, where Rockville is the new United management team, and it was largely expected that Jeff would separate from that."

For Sullivan, the decision to leave involved a culmination of personal and professional factors.

"Our deal was a result of smart people looking and reacting to the external environment," Sullivan said in an interview. "Mergers are a lot of hard work. I'm confident in my ability as a manager and I'm confident in Bill's ability as a manager, but sometimes if that is going to be counterproductive, you just have to deal with it."

In a broader sense, his departure highlights the inequality that comes from mergers, regardless of how they are billed. Industry experts admit that it may be an acceptable practice, as long as the players involved are aware that a singular culture must emerge.

"Someone always wins," says Travis Lan, an analyst at Keefe Bruyette & Woods. "These deals are announced and everyone gets on the call and says how great it is and how both companies are going to have equal weight. But people need to understand that is not the way it happens. Rarely does it turn out as perfect as it sounds."

Sometimes departures and other moves can prove useful if they result in a quicker path to a singular company, says Frank Sorrentino 3rd, chief executive of ConnectOne Bancorp (CNOB) in Englewood Cliffs, N.J., which is set to merge with Center Bancorp (CNBC) in Union, N.J.

"It is critically important for one culture to take hold, so if one person has to step aside to let one culture blossom, that is a good thing," Sorrentino says, adding that he is unaware of the specifics of the Sullivan's departure. "If you look at the mergers that don't work down the line and ask why they are dysfunctional, it is usually because there are two cultures. It is 'us versus them' and it needs to be one common culture."

Looking at United Financial, analyst say Sullivan's departure isn't a significant setback for the company. In fact, it could alleviate investor concerns that the organization was too top heavy.

One potential worry, Lan says, involves relationships in West Springfield, Mass., where United Financial was based before the merger. Prior to serving as United's chief operating officer, Sullivan was its chief lending officer for more than a decade.

Crawford proactively promoted two legacy United bankers to management posts in West Springfield, which should help settle any nerves.

"I think they did the right thing in promotion two Springfield people," Lan says. "Otherwise, that could be a valuable loss."

"While Jeff's departure was not expected, the only constant in business life is change," Crawford told American Banker by email. "Changes in management are not entirely unusual in business. We thanked Jeff for his 12 years of service to the company and wish him well."

Sullivan's departure doesn't make the deal any less of a merger of equals, Crawford says, particularly since United's shareholders received 51% of the combined company's stock. "Our customer base, ownership structure and board composition continue to demand that we treat our merger as a 'merger of equals' and we remain focused and committed to being a high performing, one United Bank," he adds.

Sullivan also has a two-year noncompete agreement that prevents him from poaching customers or employees within a 25-mile radius of United's operations. Sullivan says he is unsure what he will do now, though he says he'd like to remain in West Springfield.

"I consider banking a form of economic development and our community needs as much as help as it can get in economic development," Sullivan says. "Odds are that I'll be here doing something slightly different to help the local economy."

Overall, the management changes were not significant enough to prompt any analysts to question the deal's financial metrics, including a promise to boost earnings by 35% next year.

Though there have been a handful of mergers between similar-sized banks announced in the last year and a half, Mark Fitzgibbon, an analyst at Sandler O'Neill, says the pace has slowed recently at least in part so that others can see how the current deals perform.

"I think there are some who are waiting a couple of quarters to see how they look and to see if they are successful from a financial standpoint," Fitzgibbon says. "There are always going to be bumps in the road from a cultural and people standpoint with these deals, but they make financial sense on paper."