Mergers during the recession; why weren’t there as many as expected?

January 15, 2014 at 09:24

In the wake of the launch of our most recent survey in the ‘Managing in a Downturn’ series, we take a look at what the last five instalments have told us about the scale and form of mergers in the sector.

The decision to merge in the for-profit sector is ultimately motivated by the fiduciary duty to maximise shareholders’ ROI. One might expect a similar logic to apply to the charity sector; mergers enable greater resource for maximising beneficiaries’ benefits. Indeed, in the heyday of the economic recession in 2008, many expected a larger number of charities to merge as a survival strategy (so called ‘rescue merging’). The advantages this could bring in terms of efficiency, and in improving the bottom line, was supposed to be a no-brainer.

The financial challenges facing charities in the recession include: high reductions in investments income (many charities keep a significant proportion of their reserves in investments, therefore this has risked devaluing charity reserves), a reduction in charitable giving and public spending, and additional problems such as the reduction in value of pension funds. However, fewer mergers have taken place over the last 5-6 years than anticipated, begging the question as to what overriding factors influence charities decision to merge.

Let’s have a look at some of the trends in the sector pre-recession and during the recession.

According to the Charity Commission’s retrospective report on mergers covering the period 1993-2003:

  • Only 5% of those surveyed existed as a result of a merger,
  • 22% of all charities work collaboratively,
  • 13% of larger charities merged/considered merging in the past 10 years,
  • Large charities are much more likely to merge than smaller ones,
  • 44% of charities merging were a result of a ‘rescue merger’,
  • Small charities represented the highest proportion that merged to prevent duplication.

What does this reveal in terms of the motivations and barriers to merge before the recession hit?

The fact that a large proportion were merging as a survival strategy implies that liquidity has a large impact on the need to merge and will likely increase the number of charities merging when economic forecasts are negative.

However, we can also see that the majority of charity mergers are for reasons other than this. Some of these may reflect a need to grow, but others are for different reasons entirely. New Philanthropy Capital suggests they fall into three broad categories:

  • Protecting and investing in a valuable Asset,
  • Making efficiency savings,
  • and Exploiting synergies.

Each of these will be indirectly affected by economic circumstances. So, it may be that whilst the bottom line isn’t always an essential driver behind merger, it impacts by heightening the need to make efficiency savings and exploit synergies. Let us look in more detail at the landscape of mergers over the recession and beginning of the post-recession period from our findings in our MIAD surveys.

What impact has the economic downturn had on decisions to merge?

In 2012, 63% of MIAD respondents considering a merger said they were quite or very worried about the outlook for their charity. In the pre-recession environment this was 20% lower at 43%. The overall number of charities considering merging (by percentage) has been increasing over the recession if we contrast the Commission’s datasets to our own. The data indicates that more charities are likely to have undergone rescue mergers as a result of the recession. It is uncertain how much of the overall increase in merger can be attributed to rescue and how much to other factors, perhaps indirectly bolstered by the reality of the economic climate. The very same reasons may also put some charities in a financially unfavourable position to merge, even though it might be prudent in terms of long-term financial liquidity.

Let’s look at three other significant influences on merging during the recession period:

1. Increase in collaboration

There has been a relatively steady increase in the number of people looking to collaborate with others in the sector. Some consider this to be a more effective survival strategy than merging. The recession has presented a strong opportunity to consolidate charities’ functions, hence the push towards collaboration.

2. Socio-cultural barriers and other barriers to merging

A large number simply do not consider merging or stall merger talks part way through the process. This is likely to be rooted in socio-cultural characteristics of the charity sector. A risk of merging is losing one’s identity and diluting the charity brand. Some might label those who avoid merging for that reason as risk averse. However, a very real risk with losing identity is that this will have an adverse effect on loyal donors and may take the focus off beneficiaries in need. These risks need to be balanced.

3. A genuine strategic advantage to staying put

For many there is no strategic need to merge. This could have a number of causes: According to a recent Boston Consulting Group report, over the last century merging booms have been characterised by different market trends, in particular market consolidation and the emergence of new markets.

How does this reflect on charity merging trends?

Take the HIV sector for example. One might be forgiven for thinking that everyone in the charity sector was merging in the 1990s, but in fact there was an overload in HIV charities merging. Why? In the 1990s there was suddenly a massive growth in the number of HIV charities, responding to the growing need of HIV and growing public concern over it. A natural fallout from this was that a number of them realised they could achieve their mission better if they brought together their resources, stopped competing and merged. Although there are many charities which, on paper, would seem to benefit from a merger, there might not always be a strategic need to do so.

The latest instalment of the MIAD survey is an opportunity to probe deeper into the state of mergers in the sector and other key developments shaped by the economic environment.