Most UK Charity Mergers are ‘Rescues’ in a Brutal Environment

Most charity mergers in the UK are “rescues” of failing organisations in a brutal environment, rather than strategic moves intended to improve services and outcomes, according to new research.

UK Not for Profit consultancy, Eastside Primetimers, published its second annual Good Merger Index looking at the financial position of charities engaging in mergers in 2014-15.

The report’s findings come as Australian peak Not for Profit organisation, Community Council for Australia urged charities to merge or shut down as the sector faces a major efficiency dilemma.

The UK study found that 53 per cent of charities opting to merge or be taken over are loss-making, while 76 per cent of organisations expanding are in surplus.

“While some charity mergers were driven by strategy, the majority were driven by financial distress. 53 per cent of transferring organisations had made losses in the year before their merger, which may explain the rise in full takeovers,” CEO of Eastside Primetimers, Richard Litchfield, said.

“We believe the prevalence of takeovers is driven by the ‘rescue’ dynamic we observed – small charities in trouble have less power to negotiate to retain autonomy and identity within their new parent, compared to if they had sought merger from a position of strength.

“However, we found continuing discomfort with acknowledging the prevalence of takeovers in the language the sector uses – 56 per cent of announcements described deals as mergers, only 27 per cent described them as takeovers.”

The study found that the overall level of merger activity in the UK sector was low – among charities and social enterprises, 129 organisations undertook 61 deals in 2014/2015, out of over 160,000.

“The relatively low number of deals surprised us given that the scale of the challenges faced by the sector. The environment is becoming brutal and it’s clear the sector needs both more mergers and better mergers,” Litchfield said.

In the report’s Forward, Litchfield, said the results “paint a picture of a sector failing in its responsibility to encourage sensible planning,and should serve as a wake-up call to sector leaders, managers and board members. In light of the current trends in consolidation activity, it is clear that the sector needs both more mergers and better mergers”.

He said the findings bring into question whether board members are routinely exploring strategic options before charities run into trouble.

“Beyond the mergers covered in this Index, we should be mindful that early action could have found a home for the essential services of high profile charities that eventually failed, such as BeatBullying and Kids Company,” he said.

“The findings also question whether the Charity Commission and funders could be doing more to influence, shape and rationalise the sector.

“Housing Associations seemed to take a more clear-headed approach, choosing mergers that involved groups and subsidiaries. There are lessons here for charities, as these arrangements help merging organisations retain their autonomy and identity within a larger structure.”

Litchfield said health and social care mergers were the most common, consistent with last year’s report.

“Around 5 per cent of leisure trusts in England and Wales were involved in consolidation, representing three of the 10 biggest deals. And significant numbers of deals involving infrastructure organisations, including local Councils for Voluntary Service, were reported, driven by significant reductions in local authority funding,” he said.

The study showed that the total income for charities and social enterprises involved in UK mergers was £811 million ($A1.7 billion), or 2 per cent of the UK sector’s turnover.