The merger mystery: Why joining forces may not be the answer to Covid-19

A merger is often seen as an effective response to charities’ financial concerns – but it isn’t a solution many appear to have reached for during the pandemic. Rebecca Cooney asks the experts why

Mergers are often treated like something of a silver bullet in the charity sector. The theory goes that bringing together organisations with shared goals will create a more lean and efficient sector, cutting out unnecessary duplication. 

In a time of unprecedented loss in income and huge rises in demand, it follows that there should be a proportionate increase in the number of charities seeking to join up with other organisations working in the same space. 

Why hasn’t that been the case? 

There certainly have been calls for more mergers – in July last year, Alastair Keatinge, the head of charities at the Scottish law firm Lindsays, told the newspaper The Scotsman that mergers were “the only way” to save some charities adversely affected by the pandemic. Such mergers were “inevitable” to secure the efficiencies those organisations needed to survive, he added. 

Keatinge went as far as to call on the Scottish government to order charities to merge or lose their funding, a strategy that he argued would ensure public money was put “to the most effective use”.

Meanwhile, Eastside Primetime – a consultancy that produces the Good Merger Index – argued in a blog in September that “proactive consideration of mergers” should be a key pillar of any recovery agenda for the social sector following the Covid-19 pandemic. 

In the same blog, it cited data from the Charity Commission’s register of charities, which suggested mergers across the sector had risen by nearly a third during the first three months after the first national lockdown. 

The regulator said 114 mergers had taken place between March and June 2020, compared with 89 during the same period the year before – but warned that the findings should be taken with a pinch of salt.

Although some of the mergers explicitly listed the impact of the pandemic as a factor in their decision, such as in the case of the merger of two Sussex-based Age UK charities, many were the culmination of discussions that began long before Covid-19 took hold, and happened in spite of the crisis, rather than as a result of it. Others logged during the period could be the late registration of mergers that had already taken place, the blog said. 

Anecdotally, Lawrie Simanowitz, partner at the charity law firm Bates Wells, who routinely handles such transactions, says he hasn’t seen a noticeable increase in the number of merger instructions his firm is receiving – something he finds surprising. 

“If you look at the economic research we have seen showing a really high proportion of charities that thought they would not be able to see the year out in terms of funding – faced with a choice between going to the wall and losing everything, or trying to find some kind of host for the work that you are doing, mergers are an obvious way of salvaging what you’ve got,” he says. 

He says it is possible that government measures such as the Coronavirus Job Retention (furlough) Scheme have prevented the worst effects of the crisis from being felt just yet. 

Paul Streets, chief executive of the Lloyds Bank Foundation for England and Wales, has not seen much movement on mergers among the small charities his organisation works with, either. 

In his view this is because “they are all really occupied, as they should be, with clients” – and because, for all that mergers are touted as silver bullets, executing one successfully is far from a quick-fire process. 

“The thing about mergers is they’re all about navel-gazing, which is the last thing charities should be doing at the moment,” he says. “They’re also very resource-intensive – they consume enormous amounts of energy, time and cost, and the one thing we don’t have at the moment is time.”

The pandemic has not only robbed the sector of necessary time and funding: Ben Cairns, director of the Institute for Voluntary Action Research, argues that the practicalities of lockdown and social distancing have made the vital process of relationship-building logistically difficult.

“Even in extremis, there are things you need to think about carefully when considering a merger: whether you have a shared vision; whether the organisations are a good fit; leadership, deal-breakers – even if you strip the process down to the essentials, these things are important and going to take a bit of time and energy,” he says. 

“If you don’t know the people involved already, the only way you can get to know them is by Zoom. All of those traditional steps building up to mergers, such as coffee and drinks, teams visiting each other’s buildings – you just don’t have that.”

Life or death?

So, while the Covid-19 pandemic may have triggered a series of motives for mergers, the conditions – and perhaps the motives themselves – are far from ideal. 

Simanowitz says the fact that mergers are often seen as a solution to extreme financial problems is not helpful, even in normal times. 

“A ‘life or death’ situation is probably the wrong reason to merge,” he says. “If you’re merging in the face of a crisis, then you’re likely to make bad decisions, not least because you’re doing things in a hurry.” 

Ideally, Simanowitz says, charities should merge because, having thought it through, they believe the combination of the two organisations could lead to the strategic creation of something better and greater for the people they support. 

“Of course, if it is about having a route to survival and is better than nothing, I wouldn’t tell charities not to do it,” he says. “But it’s probably very low down the list of reasons why a charity should merge.”

Cairns agrees that with a sector universally feeling the pressure, the prospect of a merger is a different proposition than it would be under more normal circumstances.

“The proposition is the retention of something, versus the gradual disappearance of everything – that isn’t a very attractive rallying cry for people who may be wary of a process that inevitably involves disruption, loss and change,” he says. 

“However well you plan a merger, there is still an element of guesswork and it requires a leap of faith: and so I think to make the leap, whatever your circumstances, you do need a shared vision for whether you can deliver something positive – even if that’s just stability.”

The issue of stability raises an additional potential sticking point: that when a charity is driven by financial necessity to seek a merger, it is often looking for a partner with greater stability and resilience than it currently has. 

For the stronger partner of the two, this might not look very enticing in the current climate. As Streets points out: “You don’t want to be taking on a merger when one of the parties is in a really weakened state, because you don’t want to be taking on their liabilities.”

Missing identity

Yet even before the pandemic, the process of considering a merger wasn’t always smooth sailing. Among its other activities, IVAR carries out feasibility studies on behalf of charities looking to merge. Cairns estimates that at least 50 per cent of the merger studies it carries out have ended in the two organisations deciding not to go ahead.

Sometimes, he says, this is about financial issues, but sometimes it comes down to cultural factors and different ways of working. 

“There’s a whole other set of things that are about power – such as the composition of a board, and who the chief executive of the new organisation will be,” he says. Fleshing out red lines and deal-breakers at an early stage can prevent effort and money from being wasted further upstream, he adds. 

Some organisations that do not merge choose to stay independent, or go on to find other merger partners. On other occasions something will change later on that makes the case for a merger more compelling, but again, this relies on having the time to think strategically about the merger and the surrounding landscape.

The debate around mergers within the sector can also be intensely polarised and personal. While many believe it is key to creating a healthier sector, others fiercely reject this idea, with some, such as Streets, arguing that it is commercial sector thinking clumsily transposed onto the voluntary sector.

“The fact that we have a Good Merger Index, like we have a Good Pub Guide – it’s a perfectly reasonable thing to track, but why does the name pitch it as though mergers are simply a good thing in their own right?” Streets says. 

A lack of willingness to merge is frequently portrayed as charities dragging their heels, or allowing emotion and ego to get in the way of efficient thinking. But there are often valid reasons behind a charity’s reluctance to become subsumed into a bigger organisation. 

Simanowitz explains: “People have these fears, and they can be well-founded, that one organisation will swallow another and the first organisation just loses its identity – not just its branding, but its culture, its staff who face redundancies. There are concerns about what might be retained and what might be lost.”

Cairns agrees, saying the emotional and psychological aspect of mergers should not be underestimated. “Our organisations exist because people have given up time and poured passion and energy into creating something around a mission or a cause or a need, and that is the lifeblood of civil society,” he says.

“To criticise organisations for being irrational and emotional about the proposition of mergers misses the point – that’s not to say we should never challenge discomfort around mergers, but we need to acknowledge change is unsettling.”

He cites the example of Locality, the umbrella organisation for community groups that was created in 2011 out of the merger of the British Association of Settlements and Social Action Centres into the bigger Development Trusts Association.

This worked, Cairns says, because “it felt like a consensual, negotiated process, in which each party had an equal stake in key questions of organisational design”, such as governance, executive leadership, services, and name and branding. 

“It works when the smaller organisation is treated with respect, is taken seriously, given a place on the board and regarded as bringing an asset regardless of its size – this idea of exchange is really important,” he says. 

Small but mighty

Streets points out that for small charities, in particular, there are risks that go along with mergers. “Small organisations have a degree of connectedness that big ones simply cannot provide,” he says. “Look at the response to the Grenfell fire – the British Red Cross recognised there were certain things it could do well, but it didn’t have the connections in local communities, and so it relied on working with charities in their local areas. 

“That is playing out now, and it’s all about knowing exactly where to go when people are vulnerable, and being able to provide toilet paper and pasta.” 

This would not have happened, Streets says, if the relief work had been left to large organisations: “They wouldn’t have had the intelligence, they wouldn’t have been trusted, they would have been seen as part of the state. Small charities can do things big charities can’t.”

He acknowledges that mergers may make sense for national charities looking to extend their impact and reach. When the children’s helpline Childline merged into the children’s charity NSPCC in 2005, for example, the service was able to continue and benefit from the reach, stability and infrastructure the bigger charity could offer. 

But Streets warns that for small charities mergers often don’t make sense, and the push toward mergers as a catch-all solution often comes from people who don’t work in or with small charities.

A positive outcome of the pandemic is heightened collaborative and partnership working, he says, as local authorities have been forced to be more flexible and permissive in their funding to ensure services are provided throughout the crisis. The hope is that this will be allowed to continue post-Covid-19.

“There has been a narrative about small and local charities and community groups that has been really positive – much more so than we were seeing 12 months ago,” Streets says. 

“Whether that will translate into a more permissive approach to funding remains to be seen.”

In an ideal world, a merger would be just one useful option to enable your charity to do better, Cairns says. Pandemic or no pandemic, the decision should always be about identifying the most effective and appropriate way to deliver your charity’s objectives. 

“Could we be doing what we are doing in a way that might bring about more public benefit for our beneficiaries? That is a healthy question to be asking regularly, whatever the circumstances,” he says.

It is possible, Cairns adds, that once the initial crisis of the pandemic has passed and charities are faced with the longer-term project of rebuilding, the rate of mergers will start to rise. 

But, he stresses, this should only follow serious contemplation.

“Organisations need time and space to have those thoughtful, reflective exploratory conversations, and funders need to recognise that,” Cairns says. 

“There is no point beating people with a stick, saying: ‘You must adapt and evolve to survive,’ and then not giving them the headspace to do so.”

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