Mergers Are A Viable Option, But Not Without Their Risks

Whether economies of scale come at the expense of service delivery is one of the key questions not for profits considering merging, need to ask, according to a new report.

Mergers, Amalgamations and Acquisitions in the Australian Not-for-profit Human Service Sector, produced by RMIT, aimed to identify and assess the key motivations, risks, barriers and opportunities associated with mergers and acquisitions.

It found that M&As continue to pose a viable and attractive pathway for organisational restructure and growth within an increasingly competitive and resource-constrained NFP sector.

However the report authors cautioned there were various risks, barriers and opportunities involved in the different phases of an M&A set-up that needed to be considered, alongside whether there were alternatives that were more suited to some organisations.

Report author, Professor Nava Subramaniam, professor of accounting at RMIT University, told Pro Bono News the study aimed to provide systematic research, that had previously been lacking, around what was happening in the area of mergers, amalgamations and acquisitions.

“So there’s a fair bit of anecdotal evidence but you’re not finding these kind of systematic answers to what happens prior to the merger and after the merger and really everything involved around the whole exercise,” Subramaniam said.

“I think, at the end of the day, it has got to be about whether the social mission, the public interest has been served. And, to me the research is about that.

“Whenever organisations restructure, particularly if we’re talking about NFPs, the social mission, the social goal and the people who benefit from these services, their interests, must be served.”

The findings are based on 21 in-depth interviews, conducted in 2017 with board members, CEOs, senior management and finance officers of NFP entities.

Almost all participants from NFP entities stated that they either completed or considered an M&A restructure for strategic organisational growth.

Ram Subramanian, policy adviser at CPA Australia, told Pro Bono News, whether economies of scale came at the expense of service delivery was a question all organisations should be asking.

“At the end of the day, economies of scale is one of the reasons why you merge, it shouldn’t be the only reason why you merge,” Subramanian said.

“If you put aside your mission, your staff, your culture, the way you operate as an organisation, all those things, and sacrifice it for the sake of the economies of scale, you’re setting yourself up to fail.”

The study revealed that the process was often complex, time-consuming and could be costly, with the “how” as well as the “why” underpinning the success of the venture.

Subramaniam pointed out there had been a number of de-mergers in the sector, which also underpinned how important it was to consider the basics and ensure the organisational values aligned.

“It’s not just about mergers, but it is when the partnership fails. In some cases some people would actually say it is like a marriage,” she said.

“If you look at the AICD report from 2015, around about 8 per cent of the participants, if I’m not mistaken, have said that they’re thinking of de-merging.”

She said the full cost of the process was not always accounted for.

“So there is a cost, and the cost is unaccounted for. Because we’re not just talking about the cost as financial dollars spent, but also the time of the CEO, the time of the board members engaged in this process,” Subramaniam said.

“CEOs in our interviews actually say that they run almost like two big jobs at the same time and find their day to day, paid job, actually can suffer because the time is taken up talking, and negotiating in the due diligence process. So then the people cost, the hours that people spend is not accounted for as cost in a financial sense.”

Subramanian said something that surprised him in the findings was around the need for confidentiality, and how that could actually undermine the whole process.

“Of course, the need for confidentiality is going to be there, you don’t want to be telling everybody you are going to be merging, until you know for sure and you know that it’s going to be a workable solution. But on the other hand you need to keep your stakeholders informed too. How to make that balance work to me was quite interesting,” he said.

“And to me I was thinking that’s one thing that boards, CEOs and senior management working in not for profits need to consider very carefully.”

Subramaniam said not for profits could also look to alternatives to a full merger.

“There’s a range of possibilities when it comes to the reasons for restructuring and how the restructure could end up,” she said.

“It could be a very simple, cost sharing or result sharing. It could be an agreement that doesn’t have too many legal identity changes. That could be resolved through what we call allied agreements or services.

“However when it comes to acquisitions and mergers, if tends to work really well when there is a. value alignment and b. the economies of scale are very clear.”

According to the study the critical factors for successful mergers and acquisitions included board and CEO leadership, clarity of the social mission and goals, a well-designed merger plan, proactive communication and stakeholder engagement.

Subramaniam said for those organisations considering merging, her advice was to be prepared and have strong leadership.

“Unless you have strong, clear leadership you will have trouble,” she said.

“Be honest and frank.

“You need to know yourself. If you don’t know your own organisation’s mission and values how can you go and talk to another organisation to discuss or negotiate?

“That due diligence is a huge problem that comes with being underprepared. So make sure that you financial statements are audited for example, all your legal constitutions and whatever, are available, are all updated. And go in there with a clear mind, and have an understanding of what you want to achieve.”

Subramanian said in addition to legal and financial due diligence it was important to do some level of cultural due diligence as well.

“You need to serve your stakeholders and your beneficiaries in the same way that you have done pre-merger, so I would say due diligence, doesn’t just cover the numbers and the legal stuff, it also covers a whole lot of other things,” he said.

Both Subramanian and Subramaniam said it was clear that more data was needed, and they called for a register of mergers similar to the Good Merger Index in the UK.

“There is huge frustration about the lack of data,” Subramaniam said.

“A kind of register would be very, very helpful to understand the changing trends.”

Subramanian said it needed to be worked out at a policy level.

“If you cast your mind back five years we had very limited data even on charities until they set up their register, and we now have so much useful information about what charities do on a daily basis and that I think is a journey we need to take for this particular aspect of the not-for-profit space,” he space.

“I think at a policy level we need to work out how best we can approach this question of creating a database or creating something that provides information to the sector about mergers, who has merged and who hasn’t.”

The final report, which was the topic of a panel discussion at CPA’s Not For Profit Conference on Wednesday, is due to launch next week.