Mergers, acquisitions & collaborative workings in the charity & not for profit sectors
There has been much interest, in the Press, in the Charity Sector and nationally about mergers, acquisitions and collaborative workings. There are, of course, aspects of mergers and acquisitions that apply to every entity in every sector but here we are looking at the Not For Profit sector in particular. Why? I believe that as the economic recession facing us tightens its grip, the Charity and Not For Profit sector is likely, perhaps, to suffer more than other sectors. This may have something to do with the public’s attitude towards ‘giving’ that has, inevitably, suffered in the past 18 months or so. When there is less in your pocket by way of disposable income, then maybe what you would give to a charity is amongst the first victims. On the other hand, diminished levels of income could be due to fewer grants being available, tougher conditions to comply with and, perhaps more importantly, corporate donations taking a huge dive. Add to the list, the inevitable cuts in public sector spending and the result is a frenzy of Charity and Not For Profit entities looking at ways to change and perhaps sometimes improve their chances of survival. As the competition for a limited pot of public funding, corporate donations, and individual giving increases, perhaps the winners will be those who continue to look at fresh ways of doing things, and not just sticking to the old methods. The status quo is not an option.
There are some 180,000 registered charities in England and Wales; normally a charity is registered with the Charity Commission if its income exceeds £5,000 – if it is over £10,000 the Charity Commission, as the regulator, would expect to receive annual information and accounts.
The Charity Commission is a great source of information and charities are encouraged to seek information and guidance from the Commission on a whole range of issues. However, sometime one can feel that too much information can be provided and the danger is that it confuses rather than helps. When you look at the Charity Commission website, there are a significant number of publications to help you with mergers and acquisitions – some, however, repeat themselves and some are perhaps not as clear as some charities may hope for. What is important, however, is that the Commission does openly encourage charities to consider ‘seriously’ and ‘imaginatively’ if there are ways in which they ‘could do more for their beneficiaries by working together’. In order the facilitate this, the Charity Commission has set up a Merger and Collaborative Working Unit which acts as both an internal and external focal point for mergers and collaborative working issues. The aim of the unit is to help to facilitate complex mergers and collaborative working arrangements, and to disseminate useful information about the subject. The unit, however, is not large and therefore is continuously under pressure to deal with its objectives.
Interestingly, and perhaps contrary to the common belief, the majority of mergers do not need the consent of the Charity Commission. Usually, and more often than not, the charity’s own governing document, be it a Trust Deed or Articles and Memorandum of Association, will contain sufficient powers to enable a charity to merge with another, provided of course that the objects of the two are similar. All that the merged charities need to do is to inform the Commission at the end of the merger process, so that the Charity Commission can keep the Central Register of Charities up to date.
Following the Charities Act 2006, in December 2007, the Charity Commission has set up a Register of Mergers. Information about mergers gets updated on the register on a monthly basis and there may be more traffic in the direction of the register in the next few months. The main purpose of this register, however, is to help ensure that legacies left to charities which merge, and therefore ‘disappear’ from the Register of Charities, are automatically transferred to the new merged charity. Most importantly, the use of the register is probably limited to those with an interest in legacies in charities that merge with other charities. Registering the merger with the Charity Commission is only compulsory where a ‘vesting declaration’ is used. In other cases, it is voluntary! So, in my view, it is difficult to use it to draw any conclusions on the state of mergers in the Charity and Not For Profit sector. For example, are we experiencing more merger in the past year or so?
The Charity Commission have conducted a survey on mergers, though the result of this should be considered in the same way as any other survey – with caution. The survey revealed some interesting statistics;
- 22% of all charities work collaboratively
- 33% of all charities report an improvement as a result of collaboration
- 5% of all charities exist as a result of a merger
- 13% of large charities merged/considered merging in the past 10 years
- 54% of charities would merge to increase efficiency
- 44% of charities would merge to rescue a charity in difficulty
- 42% of charities would merge to prevent duplication or to improve services
Most common reasons given for collaborations were
- 59% sharing knowledge
- 49% joint service delivery
- 40% sharing resources to increase efficiency
However, the above statistics also tell us that 78% of charities do not and have not worked collaboratively. So why is it that despite the huge perceived improvement in service delivery, most charities have shied away from any collaborative working? It could be that the charities believe that collaboration may direct resources from existing activities, or that it may compromise their independence. Neither, in my view, should be of much concern provided proper planning and analysis is carried out before agreement for any collaborative working is reached. Before anything is formalised, and yes it is absolutely essential that it is formalised, Trustees should ensure that any collaboration is generally in the interest of the beneficiaries and will further the object of the charity. Formalisation of the process, in my view, is important as it focuses minds of people, both internally and externally, and also highlights what the arrangements are, so that there are no misunderstandings between any of the parties. The charities should formalise any collaborative working by either a Memorandum of Understanding, a Contract or a simple Service Level Agreement.
The results of the survey by the Charity Commission in case of mergers is more interesting. It reveals that whilst 13% of large charities have considered a merger, only 5% of all charities exist as a result of a merger in the last decade. Can the current economic climate still cater for so many charities fulfilling the same function, servicing the same range of beneficiaries and working in the same areas?
The statistics that I believe will make the difference to the number of megers in the next couple of years is the fact that 44% of charities stated their motivation for seeking a merger was to ‘rescue a charity in difficulties’. The number of charities in difficulty may therefore increase potential mergers. Two areas of discomfort facing charities in the past couple of years have been high reductions in investment income (coupled with loss of value of investments, which have resulted in decline in the general reserves of charities) and the reduction in value of pension funds, which had led to higher ‘service costs’ and annual contributions to pension schemes. Will these and other factors resulting from the general economic downturn not put a large number of charities in the potential merger pot? I think it may well do so.
However, decisions made in desperation are usually flawed and could have severe negative consequences. It is important to distinguish fully between collaborative workings and mergers. A merger means two or more charities coming together to form one organisation, be it a complete new charity, or an existing one taking over the other. This ‘coming together’ is significant. The old parties to the merger no longer exist after the merger has taken place. Collaborative working, on the other hand, is no more than joint working by two or more charities in order to fulfil their purpose whilst remaining ‘separate organisations’. This is the key difference with being collaborative workings and mergers. Therefore, the cost of merging for a charity is loss of its identity and hence decisions about merger talks need to be taken with full knowledge of the effect of the merger.
I don’t propose to list what steps should be taken by each party in the case of a merger or collaborative working. Nor do I want to list the due diligence requirements in each case. There is plenty of information on both of these areas and, as mentioned above, the Charity Commission is a great source of providing this information. What I do want to emphasise is the huge costs of mergers, especially if they go wrong. And ‘go wrong’ they can!
What the sector should not do is to allow itself to panic to such an extent as to start merger talks between charities without them going through the thought processes effectively first. In my view, true mergers do not work; certainly in the Charity and Not For Profit sector. It is more a case of one charity ‘acquiring’ the other. One party wins at the expense of the other. Therefore I urge caution. I believe it is absolutely imperative that any merger talk begins after collaborative working has taken place and proved to be successful.
Mergers are sometimes compared to marriages, best to know the other party before fully committing yourself! Collaborative workings on the other hand are like courting and ‘getting to know you’ period that could or could not end up in marriage (merger). The other important aspect of collaborative working and mergers, in my opinion, relates to what I call the ‘get out clause’. It is important that before any collaborative working or merger activity takes place, there is a plan for ‘what if it doesn’t work out’ scenario. Now, it is not difficult to see that in cases of collaborative working, clauses can be built into the Agreements about its termnation – where do you go when mergers don’t work out? Not quite so simple. Therefore, in my opinion, the best course of action for the sector at the moment is to continuously seek new ways of working together, so that the use of resources can be enhanced efficiently but at the same time keep an eye on the possibility of mergers. Charities should always ask the important questions of ‘what’s in it for our charity’ and ‘what if it goes wrong?’ They should not let the uncertainty of factors outside their control force them into a position which may not suit their beneficiaries and which could have dire consequences for the charity and the public at large.