To merge or not to merge - is that the question?

Will there be more charity mergers in the wake of the pandemic?

Overt the last few months we’ve read lots of articles and heard many colleagues and clients predicting a major increase in the numbers of charity mergers as a result of the impacts of the pandemic. For many it seems to have gone beyond a prediction and become an inevitability.

Presumably the assumption is that the financial distress many are experiencing as a consequence of measures taken to control Covid-19 will inevitably drive them to look for merger partners as a way to make efficiency savings.

However, the evidence from the last major financial crisis (the 2008 credit crunch and subsequent austerity) is at best ambiguous. At most it shows only a small up-tick in merger activity around 2010-12.

There may, of course, have been other collaboration activities aimed at realising financial efficiencies such as asset transfers, shared services and consortium delivery, but there is little or no comprehensive evidence to support a view either way. Moreover the austerity many expect to result from the current economic crisis may well be much more severe; certainly the financial shock to charity fundraising and income generation has been already.

Given the uncertain and volatile environment that is likely likely to persist for years to come, predictions of future merger activity are likely to be little more than educated guesses and are perhaps somewhat futile.

Should charities be pursuing mergers in the wake of the pandemic?

This is, perhaps, the more important question and, of course, one to which it is impossible to give a definitive, universal answer. What we offer here, therefore, are a few important things to think about before rushing headlong into a merger (or other form of collaboration).

Values and culture

In our experience, and that of every other expert we have ever discussed mergers with, the single most important factor in the success or otherwise of charity mergers work is whether there is a good fit between the parties in terms of their core values and organisational culture.

A good fit goes a long way to enabling both a positive and constructive pre-merger experience and, more importantly, effective integration post-merger.

A significant mismatch almost always results in a very rocky ride and, sometimes, a complete failure. All too often we have seen a cycle of merger, followed by key staff from one partner leaving in disillusionment to form a new charity, and before you know it you’re back where you started with no real savings/benefits and all the costs of having made the merger happen in the first place.

The key consideration, and for us the main reason that the charity sector makes such a difference in society, is the fact that the people who work in charities (paid or otherwise) usually feel a strong sense of loyalty and ownership of "their" charity. Almost all mergers challenge and disrupt that loyalty and it needs to be rebuilt and nurtured for months or years after a formal merger has taken place.

Spending time getting to know each other, often over years of working together collaboratively on projects and services, really pays dividends in building trust and enabling effective integration.

People

A very close second in the race for the most important factor in the success or failure of mergers is people. Of course people make up the organisational culture, determine the values of the charities involved and nurture (or not) the trust and confidence necessary for a successful merger.

But it goes beyond that. There are real practical matters to think about including what the governance and staff structure will look like in the merged organisation and who will take on which roles. Put crudely, two CEOs into one doesn’t go, two Chairs into one doesn't go and so on.

There may be obvious answers to these issues for those taking a dispassionate view of the questions (though there may not be) but those directly affected are not dispassionate; they may be very profoundly affected both practically (it may be their livelihood at stake) and emotionally (they are almost certainly passionate about what they do).

Again, taking time to work through these questions early on will be critical and will often .make or break the merger

Money

Often. though not always, the quest for financial efficiencies will have been the initial impetus towards a merger. The received wisdom is that merging will reduce costs through unification of support functions and reducing fixed overheads. While this is usually true to some extent, our experience is that the savings are rarely as much a predicted and often the payback period (to recover the costs of making the merger happen in the first place) is much longer than anticipated, particularly when the considerable staff time taken to develop and implement a successful merger is taken into account.

Unless the reason for the merger is, in effect, an emergency rescue of an organisation (or part of an organisation) that would otherwise be about to fail, our view is that financial efficiencies should only ever be one factor amongst many in deciding whether or not to merge. In fact, we would go as far as to say that money should usually be a secondary factor and that enhanced services and better outcomes for beneficiaries should be the dominant considerations.

Structure

Getting the structure right for a merger is important, but it can’t guarantee success (although getting it wrong can accelerate failure). Often, when we are approached about helping with a potential merger, the first question we are asked is “what is the best structure/process to follow”. Sometimes it is even, “we have decided what we want to do but need someone to do the due diligence”.

Almost every time, we discover that the process of building trust, gaining clarity about objectives and working through the key questions about culture and people has barely started and that the structure and process questions remain some way off. Moreover, while there are cultural and emotive considerations in deciding a future structure, these questions are usually more driven by technical factors such as whether leases or funding agreements can be novated or not.

Each charity is different

Our view, therefore, is that each charity (or each potential partnership of charities) is likely to come to different conclusions when thinking about the issues we have raised in this article.

Unless the situation is one of dire financial emergency, time should be taken to work out the critical issues around culture, values and people as well as to take a realistic (even pessimistic) view on the financial pros and cons.

It may be that there are important stepping stones along the way towards a potential merger such as delivering joint projects or services, sharing “back-office” functions and/or sharing premises. Such a step-by-step approach will help build the trust and confidence from which a sustainable, long term solution is much more likely to emerge. It may also, if designed well, realise some of the anticipated benefits of a merger such as better outcomes for beneficiaries or cost savings, without actually merging.

If an urgent “rescue” merger is required, then both parties should clearly understand that it is likely to be a rocky ride with potentially painful consequences for both sides before long-term benefits are achieved.

In the end, each charity, each potential partner and each context is different and so there is no universal answer to the question “should charities be pursuing mergers in the wake of the pandemic” and certainly no universal answer to the question “should/will there be more charity mergers because of the impacts of Covid-19”?

However, there probably is a clear answer to the question “should charities be thinking about mergers”. Our answer is “yes”, but carefully, with no preconceived outcome in mind and only where there is the prospect of delivering better services and outcomes for beneficiaries than would otherwise be possible (which is, after all, a core duty for charity Trustees).

If you would like to find out more about how to make mergers successful or about our services for supporting collaborations and mergers more generally, please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion