Analysis: Mergers - What do they consist of?

As more and more charities move towards merger, Richard Gutch describes the stages they will have to go through, the costs involved, and the chicken-and-egg questions they will have to answer

Speaking Out merged with Advocacy with form VoiceAbility
Speaking Out merged with Advocacy with form VoiceAbility

After years of discussion, charity mergers are becoming a reality. Throughout the past century, the trend was for charities to develop innovative projects and spin them off into independence.

The National Council for Voluntary Organisations alone gave birth to what are now the National Council for Voluntary Youth Services, Community Matters, Citizens Advice, Age Concern, the Charities Aid Foundation, Acre, Navca and others.

Today, the process is going into reverse. The Development Trusts Association, formed less than 20 years ago as a breakaway faction of Bassac, and having grown bigger than its parent, has merged back with it to form Locality. After several false starts, Age Concern England and Help the Aged have merged to form Age UK.

Sometimes there is an external imperative for a merger, such as the advent of anti-viral medication in the 1990s, which completely changed both the role and the funding of Aids charities and led to the merger, at that point, of the Terrence Higgins Trust and eight regional Aids charities. The Office for Civil Society is currently trying to incentivise mergers between national infrastructure bodies by making clear that those planning to merge stand a better chance of getting the maximum grant of £500,000 from its partnership fund in 2011/12 (although all grants will be cut to zero by 2014). Frantic discussions between the OCS's strategic partners have been taking place as a result.

Richard Gutch This article is based on the author's current experience of managing a merger between three disability charities and on interviews with key people involved in the mergers of Speaking Up and Advocacy Partners (to form VoiceAbility), DTA and Bassac (to form Locality), Rainer and Crime Concern (to form Catch 22), Age Concern England and Help the Aged (to form Age UK) and the Terrence Higgins Trust and eight regional Aids charities (to form an enlarged THT).

Structural change

Mergers involve structural change and can take two forms, each in two versions: a unified structure, usually involving the takeover of one charity by the other, but sometimes involving the creation of a new charity into which the two charities transfer their assets; or a group structure, usually involving the larger charity as the holding company with the other charity as a wholly owned subsidiary, but sometimes involving a new joint holding company with both charities as subsidiaries.

Mergers take time and involve three distinct stages. The preliminaries can go on for years and usually involve either the chief executives or the chairs having initial discussions and then, sometimes, commissioning an independent feasibility study reporting to a joint steering group.The outcome is a decision by the two boards to pursue merger seriously - or not.

The second stage is the formalities. These are likely to take about a year if the charities are membership charities, where final decisions have to go to member annual general meetings, but less for non-membership charities, for which final decisions are taken by the boards.

The third stage is the aftermath - rebranding, restructuring, harmonisation of staff contracts and co-location. This follows the formal decision to merge, not least because of the costs involved. It is a big mistake to go straight to the formalities before the preliminaries.

Vested interests

Mergers also require independent facilitation. Inevitably, there are vested interests at the levels of board, chief executive, senior management team and staff. Independent facilitation is essential for mediating these, as well as for providing extra capacity to cope with the work mergers involve. A major challenge is to agree a shared, compelling statement of core vision and values that all parties can buy into and that can be a source of energy and inspiration when the going gets tough.

Mergers are always viewed as takeovers by one of the parties - and that is often what they are. The smaller or financially weaker charity invariably sees itself as losing its independence and voice. Most merger processes go to great lengths, often over the odds, to overcome this perception - for example, by having equal numbers of trustees and sharing out senior management positions.

The cultural issues are often the hardest. The greatest prize, which is also the biggest challenge, comes when two different but complementary charities merge and the sum of the parts really is greater than the whole. Achieving this requires a big investment in consultation, communication and joint meetings and in addressing the preconceptions staff have of each other.

For all these reasons, mergers cost money. Some costs, such as accommodation, rebranding and redundancy, will vary. Others are likely to apply in any merger; for example, two medium-sized organisations with a turnover of about £500,000 and with membership structures could easily spend £100,000 or more between them on independent facilitation (£30,000); due diligence (£5,000); risk assessment (£5,000); legal fees (£20,000); auditors' fees (£10,000); consultation (£10,000); communication (£10,000); and new systems (£10,000). If you add in the variable costs, this total could easily double or treble.

Funders, especially the government when it is incentivising charities to merge, should help to meet these costs. It is disappointing that the Cabinet Office, despite positive noises, has not yet responded to the recommendation of the NCVO Funding Commission for a restructuring fund to do this.


 

THE CHICKEN AND EGG OF MERGERS

Any management manual will stress the importance of providing decision-makers with all the information they need. Also important are a clear organisational strategy, a robust business plan, strong leadership at board and staff level, and the involvement of managers in developing plans and establishing teams. But mergers present a series of chicken-and-egg questions that make it very difficult to put this into practice.

1. How can members and trustees decide whether a merger is the right move without knowing what the merged organisation's strategy, business plan, leadership and staffing structure is going to be?

- Agree in principle to explore a merger, but make a final decision only when the likely shape of the new organisation is known.

2. How can you develop a clear strategy and business plan for the new organisation when it is not clear what the leadership of the new organisation is going to be?

- Have a joint steering group of trustees and chief executives and decide on a chair-designate and chief executive-designate (preferably from different organisations) as soon as possible. Involve an independent facilitator, initially reporting to the joint steering group and then to the chief executive-designate, once appointed.

3. How can you involve senior managers early on when you don't know what kind of senior management team you can afford or who the members are going to be?

- Have some initial joint senior management team meetings to get early buy-in; once the joint steering group or new board has agreed a strategy and draft business plan, decide on an appropriate and affordable management structure, and appoint senior managers-designate so that they can then be involved in finalising the business plan and developing the new organisation.

4. How can you reduce staff uncertainty - about potential redundancies, for example?

- Be as open as possible about the process and the timetable, and ensure staff are consulted at every stage; make clear when decisions about their positions will be made so that people can plan accordingly.

5. How can you commit expenditure to a merger when you don't know if it is definitely going to go ahead?

- Don't commit to any expenditure unless you have the reserves or the grant funding to support it; minimise commitments until members or trustees have agreed in principle to explore the possibility; phase expenditure so the biggest items - accommodation, rebranding, redundancies - don't occur until after the formal decision to merge; and be open with grant-makers about the potential risks in the period up to the formal decision.

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