Merger activity within the social housing sector has stepped up significantly over recent years and while many have been successful, some have not.
To be able to consider why mergers break down, we first need to understand why they are initiated in the first place. While each merger will have its own individualisms, I find that there are typically two reoccurring themes in the sector triggering the conversation, either: a housing association is financially stretched and would benefit from support; or a chief executive is retiring.
This is in stark contrast to the private sector where the rationale for a merger is far more objective; there is a price paid by the acquiror to the acquiree, meaning shareholders (including senior management) are often financially remunerated when the transaction takes place.
As housing associations are charities without an equitable value, no such payment takes place and, therefore, the whole process becomes more subjective.
Housing associations seeking support
To consider the two main themes separately, let’s start with the housing associations that would benefit from support. While the sector has made great strides in its governance over recent years, from time to time, ambitious development plans have stretched some housing associations financially. As an organisation approaches, or even hits, its financial capacity, in order to continue to build and support customers, that association would benefit from the financial backing of a larger, more financially stable sector peer.
This creates an interesting dynamic as the board of the stretched association will face the likely prospect of being consumed by a larger peer, inevitably resulting in the reduction of decision-making powers.
There will also be restrictions implemented which will limit autonomy of the board. In addition, there will be some cultural change.
As a result of all of this, board members may begin to question the new direction and job security becomes a concern for senior executives. These uncertainties can be major factors in why mergers fail to progress.
If we believe that a support merger is fragile, then a retirement-driven merger is even more delicate. The housing sector has a reputation for retaining chief executives until retirement and, as a consequence, they serve long tenures. In some cases, the retirement prompts some to desire a new direction for the organisation. In this situation, you have all of the issues associated with a support merger plus arguably a less clear rationale for merging. The mantra that bigger is better is not always correct, and organisations need to consider what any merger means for the various stakeholder groups including customers, colleagues, funders and local authorities.
As an accountant, I am always supportive of driving out cost synergies and putting in place more efficient operating models that spend the customers’ money more wisely.
Organisations need to ensure the proposed efficiencies are deliverable and not consumed by lenders seeking fees for providing the required merger consents. Most importantly, the merging organisations need to ensure the services to the customers do not suffer as a result of the distraction caused by the merger.