Financial distress is a bigger factor in charity mergers than clear-headed planning, according to a new report out today.
The Good Merger Index, published today by the management consultancy Eastside Primetimers, analysed 45 of 61 charity and social enterprise mergers involving 89 organisations mainly in England and Wales that took place in the 12 months to 30 April this year. Some organisations were involved in more than one deal.
The report says that slightly more than half of the organisations involved in deals over the year in which they became part of another organisation or merged with an organisation of roughly the same size had made a loss in the most recent financial year before the merger, compared with 24 per cent of acquiring charities.
The report says there has been a sharp rise in the number of charity mergers that should be classified as takeovers since the first edition of the report was published last year.
This year’s report says that 44 per cent of acquiring organisations were growing at a rate of more than 3 per cent a year. It says that the data implied that "financial distress was often a bigger driver than clear-headed planning".
The report says that Eastside Primetimers’ analysis "appears to confirm that many charity mergers are constructed as ‘rescues’, where a smaller charity in financial distress seeks merger with a larger, more stable organisation in order to safeguard its services from closure".
The consultancy is of the view that this type of deal has become more of a feature of the sector in recent years because of funding instability, the report says.
"If so, this is not necessarily a positive sign for the sector," it says. "Mergers are often better when they are proactively sought from a position of strength, as part of a clear strategy to increase the social impact of the charity and enhance outcomes for its beneficiaries. Mergers conducted on this basis allow the organisations to fully review their options and negotiate a better deal for themselves."
It concludes that a "real step change towards more and better consolidation" will take place only when boards routinely explore merger from a position of strength and the Charity Commission takes on a "more proactive role, exercising powers to stimulate and regulate mergers".
The report says: "Interestingly, the top deal of the year – the equal merger that formed Breast Cancer Now – involved two loss-making organisations coming together to shore up their financial positions."
It notes that three of the largest six deals in 2014/15 involved leisure trusts.
The volume of consolidations in the sector remained broadly the same as last year, which is a surprise given the challenges faced by sector, the report says.
Richard Litchfield, chief executive of Eastside Primetimers, says in his foreword to the report that the proportion of charities that go into mergers on the back of financial losses "paints a picture of a sector failing in its responsibility to encourage sensible planning, and should serve as a wake-up call to sector leaders, managers and board members".
He says: "The findings bring into question whether board members are routinely exploring strategic options before charities run into trouble.
"Beyond the mergers covered in this index, we should be mindful that early action could have found a home for the essential services of high-profile charities that eventually failed, such as BeatBullying and Kids Company."