To merge or not to merge – what housing associations need to consider

The social housing sector is in a state of major flux and housing associations have perhaps never faced so many challenges at any one time.?As housing associations assess how they take on the challenges, many, in particular smaller social housing providers, are considering whether to continue going it alone or are they better being part of a bigger organisation. In this DTP Views blog, DTP Director Andy Roskell talks through the steps organisations should consider when looking at mergers, as well as the type of merger options.

Mergers have long been a feature within the social housing sector.?Some of these have happened as a result of financial or regulatory difficulties faced by one of the organisations, leading to a ‘rescue’ from a larger association, or housing group.

Many more however, have taken more conventional routes, often starting with initial, high level, discussions, between chief executives and chairs of boards, exploring the synergies and potential strategic and operational benefits that could be achieved from the combination of organisations. These initial discussions (should the outcomes be positive) then lead into a quite structured process, eventually bringing ‘legal effect’ to the coming together of the organisations.?

I am often asked, when I speak to boards about these matters, whether the perceived benefits from mergers ever actually get delivered.?The benefits can vary but often include cost savings, generated through combining ‘back-office’ functions and other elimination of duplicated effort and costs, most of which are earmarked (in a ‘business case’ for merger) to be re-invested in improvements to services and the provision of new homes or other key priorities identified in those early discussions.??

What is the answer? The answer is that the expected outcomes from the business case are not always carefully tracked, beyond the date of the coming together. ?There are some excellent examples where the delivery of savings and benefits have been very closely tracked and reported to board, but mostly this is not the case.?This is because, put simply – things move on.?We have seen how much has happened over the last two to three years and even more recently the past six months of a combination of political and economic turmoil have conspired to turn our businesses upside down.

Recent history has been incredibly tumultuous, but to a lesser extent change happens all the time and corporate priorities have to change with the times.?This means moving resources around and making strategic decisions about the short, medium and longer term, direction for the business.?This is correct and appropriate, although it can be somewhat inconvenient for those expecting a linear level of delivery of outcomes enshrined within and expected to be delivered from the merger business case.

So, should we ever think about considering a merger, given the track record of delivery, which is less than transparent, for the reasons I have suggested??I advise boards that consideration of the potential of a merger is often worth doing, provided that you have evidence that the effort could be worth the investment of time (to begin with) and resources (if you begin to feel that the concept has ‘legs’). ?That said, it is essential that a clear headed approach is taken and that, as far as possible, emotion is kept in check.?Emotion in these matters can lead (and has led) to wrong decisions – logic and structure must hold sway.

Can merger deliver an improved future for your organisation? There is no simple answer to this, as each organisation is different, but there are some important considerations which can help executives and boards to approach these matters with logic and a strategic, clear-headed approach, to enable complex matters to be explored and an informed view to emerge.

A starting point, before any discussions with a possible partner, is to develop a ‘position’ on merger.?This can (eventually) be enshrined within a ‘merger position statement’. ?The process should be strategic and as dispassionate, as possible.?My recent experience of facilitating such discussions appears to me to be less emotive than such discussions were say 10 years ago.?Most boards now, it seems to me, approach these matters in a strategic way, with a dispassionate consideration of the opportunities as well as the risks and possible threats.

Basic considerations must include the following:

·???????Consideration of corporate objectives – how confident is the board in the delivery of these targets, as an independent organisation?

·???????Business drivers – in light of the foregoing and in the event that an opportunity emerges to explore a potential partnership with another provider, what essential outcomes must feature to make partnership proposals potentially attractive? ?These could include:

o??Optimising capacity and efficiency to facilitate growth and investment

o??Increasing strategic impact, improving resilience and management of risk

o??Attracting and retaining key staff

o??Developing a stronger staff culture and enhancing reputation

o??Providing capacity to deliver better services and a broader and more robust service offer

o??Improving the level and scope of social investment

o??Providing security to address concerns over regulatory, operational or financial resilience

·???????‘Red Lines’ – What does the board hold dear? What must be achieved / or not lost – as a result of a partnership??It is important that these are clear at the outset of any partnership discussion, as for these to emerge later in discussions much time and energy can be wasted and can eventually lead to the collapse of discussions. A key consideration, I would say, must always be ‘cultural fit’.?This is at least as important as financial and operational factors and is often cited as the reason that some mergers don’t achieve what they set out to do and why some never happen at all.

·???????Types of partnership – It is useful to explore and understand the different types of merger, all with pros and cons to be explored.?These typically include:

o??Joining a larger, national group

o??Joining a larger, but regional association or group

o??Creating a ‘merger of equals’ (similar sized organisations)

o??Creating a merger through smaller organisations joining your organisation

Note – In each of these cases, merger can be accommodated through ‘full merger’ of entities, or through entities becoming subsidiaries within existing or newly created group structures.?There are many pros and cons to these options, which must be fully explored.

·???????Conclusions – Board appetite for partnership can be tested, during these discussions, in the event that an opportunity for a discussion emerges, but ultimately, consensus can be gained and a position clearly arrived at.?This can of course be reviewed as often as necessary, but fundamentally some key issues have been explored and the board is able to consider relevant opportunities from an informed position.

It would be remiss of me to close without stating clearly that any merger (regardless of the benefits emerging from the business case) absorbs very significant energy, time and resources.?They can take between six and twelve months to bring about and as such they carry many risks as well – not least the drag on the business, often challenging ‘business as usual’ performance, but often leading to the loss of key staff, concerned about their futures.?

All of these important considerations can be effectively managed and mitigated, as part of a structured project plan, incorporating the project to ‘day one’ and ‘beyond day one’, but nonetheless these are important matters to bring to the table as opportunities emerge and are examined.

If your organisation is considering merger and/or seeking to identify a merger partner and would like some support, then contact me to arrange an initial chat: [email protected]

DTP was established in 2006 and since this time it has advised many organisation in these matters.?Andy Roskell has advised boards on all these matters and he has also brokered many merger partnerships.?Andy has managed a significant number of due diligence exercises, as part of merger processes, including financial, property and cultural due diligence.