Mergers: The dog that didn’t bark

As the pandemic hit the charity sector, the need for support from charities, both around the world and in the UK went up, while the resources to deliver them went down as they struggled to fundraise in light of social restrictions and the UK aid cuts took hold.

Much was said and written about the likely consolidation of not for profits through merger and acquisition. The trickle, we were told, would become a torrent. In reality, very little has changed over the last two years. The latest edition of Eastside Primetimers’ Good Mergers Index, showed no discernible increase in our merging tendencies in the first 6 months of the pandemic.

How many charities?

It’s certainly true that mergers are not a panacea that will automatically increase how many people NGOs reach and the impact of their work. Much can be achieved outside a formal merger when organisations collaborate or work in consortia, but the 10,373 entities working in “Overseas Aid and Famine Relief” on the Charity Commission register in England and Wales alone, might just suggest a mismatch between supply and demand.

Back in August came the announcement of the United Purpose merger with the Gorta Group, which includes organisations such as Self-Help Africa. September saw the “formal partnership” between YCare and All We Can. But precious little else.

Barriers and beliefs

Unsurprisingly there are significant barriers to overcome for organisations contemplating mergers and formal partnerships, and it may be that some of the conversations that began to develop at the start of the pandemic are yet to emerge as fully formed agreements. But other obstacles may include time, cost, legal issues, lack of donor funding (Esmee Fairbairn a notable exception) and cultural fit. And, dare we say it, “merger” is a bit of a dirty word in the charity sector, too redolent of either failure or aggressive acquisition. If collaboration is the Cinderella of the NGO world, then mergers are its very ugly sister.

So what are the factors that determine the success or failure of a merger, and in what circumstances is a merger the right option?

Critical success factors

Ultimately the critical factor is whether a merger is in the best interests of each charity’s ultimate goal. Key areas to consider are whether it will improve the quality of the NGO’s work – for example, by delivering cost savings, increasing income, making the best use of resources or providing access to a greater range of resources or expertise.

To achieve a successful merger, there should be compatible objectives, culture, and values. Such intangible factors can make a very significant difference in the success (or otherwise) of a merger.

There should be a unified approach at the board level, with the trustees collectively being clear that they believe that a merger is the best way forward.

Trustees and management should also be clear on the reasons for the merger. There are a number of reasons why charities may choose to merge. Financial considerations are often key – this may include cost savings, or the ability of a merged organisation to generate funds. But this is not the only reason why an organisation could consider a merger. In smaller organisations, a change in personnel is one factor that can prompt considerations of merging – for example, a long-standing founder Chief Executive or Chair stepping down may raise more fundamental questions as to the ability of the charity to replace that individual and of its strategic direction. Understanding the key drivers at the outset allows potential mergers to be properly assessed against those requirements.

Risks and benefits of merging

In any potential merger situation, it is important that there is a full assessment of the risks and benefits of merging.

An initial feasibility assessment should be carried out early in the process. This will flag any potential issues or barriers to be addressed through discussions. The assessment will need to be revisited (and expanded) later in the process, however time invested early should help to identify any deal breakers.

Factors that should be considered will include:

• What impact will this have on the work the organisation does?
• What will the potential income base of the merged charity look like? Is there a significant risk to existing income streams because of the merger?
• What is the potential cost base of the merged charity and how does it compare to the status quo? Are there cost savings that can be generated and how certain are those efficiencies?

The risks and benefits of merging will vary significantly between organisations. Crucially, it is also likely that they will vary between merger partners – i.e. each partner will have different needs and requirements from a merger, and it is important that the potential merger partners are transparent with each other about those differing needs.

What are the benefits of mergers?

The potential benefits of a merger could include the following:

• Access to wider skillsets and potential for improved learning and resources
• Improved quality and scale of programmes
• Improved efficiencies which lead to financial savings, including reductions in duplication
• The potential for greater sustainability lead to financial security, which may include increase access to funding
• The possibility of better public profit and reach as a larger organisation

What are the risks of mergers?

The potential risks of a merger include the following:

• Would a merger be in the best interests of the people an NGO supports and works with?
• Bigger may not always be better – e.g. is there a risk of a loss of specialism or innovation, or that the new entity will be too large to govern?
• Is there a risk of loss of autonomy, values? and identity?
• Have the time and costs been considered? This will include the time and costs of the merger process itself

Our next blog will explore the practicalities of mergers and the key components of success.

Bond, haysmacintyre and Russell Cooke will be exploring the challenges of mergers in a webinar on 9 February at 15.30.