Mergers offer charities an opportunity to enhance their scale and expertise or shore themselves up financially spreading their overhead costs across a larger income base, and so I absolutely think we should see more of them in the years ahead.
So let’s start by thinking about what deals charities are doing right now and why.
Last summer, Eastside Primetimers published the Good Merger Index, the first study of its kind to record merger activity in the charity sector (we are now working on a second edition of the Index covering deals in 2014-15). The most striking thing we found was how rare charity mergers are, despite the strength of the case for them. In 2013/4, 90 deals involving 189 organisations were concluded, in a sector that includes 164,000 registered charities in England and Wales. This tells us that there isn’t yet enough understanding of mergers in the sector and how to get them done effectively.
Mergers offer charities an opportunity to enhance their impact for their beneficiaries through greater scale and expertise and they can also create new organisations – almost overnight – which are better placed to respond to shifts in community need. Among charities that have undergone merger recently we have seen commissioning trends become an important driver. 53% of charity mergers were in the health and social care sector, where the drive from commissioners for cost-efficiency and service integration has led to contracts being bundled and has caused charities to consider how they can offer a broader range of services. Some have responded to this through merger such as national mental health charity Richmond Fellowship which has taken over substance abuse charity Aquarius, or Addaction which has taken over KCA. In both cases mental health, drug and alcohol treatment services were brought together under one roof.
Our Index also explored the language the sector uses around charity mergers. 73% of mergers were essentially takeovers (where one organisation acquired another), while 23% were true mergers, where two balanced partners were forming a new organisation. However, charities described 58% of deals as ‘mergers’ and 12% as ‘takeovers’ in their press releases, confirming that the sector tends to be poor at communicating about the details of its deals. Although this may be well-intentioned it runs risks. At a recent roundtable we hosted for charity leaders and experts many recalled experiences of mergers where vague language had created false expectations among their staff or led to valuable time being wasted on fruitless discussions.
Some charities have found a way of retaining their identity whilst achieving cost savings through the use of a group structure, where an acquired organisation becomes a subsidiary but keeps substantial operational autonomy. The benefits of this kind of deal are many. They can allow local charities providing a strong service to keep their own identity and way of working, while benefiting from the scale and stability their new parent organisation grants them. From a financial perspective, they can help mitigate risk – for example, pension issues can be ring-fenced in a subsidiary and contracts do not need to be novated. This means the upheaval of a merger is limited and organisations can carry on business as usual, while implementing synergies at a controlled pace.
It’s clear that fresh thinking will be needed in the sector in light of current trends fuelled by the economic situation and heightening demands in the public service commissioning market. More chief executives and trustee boards should consider it their duty to at least explore merger, as it might well be the best thing for their organisation and the beneficiaries it was founded to serve.
This article by Eastside Primetimers chief executive Richard Litchfield originally appeared in the June 2015 edition of Finance Focus, the monthly membership magazine of the Charity Finance Group (CFG).