Opinion: To merge or not to merge?
Published by Max Salsbury for 24dash.com in Housing
Opinion: To merge or not to merge?Image: Housing via Shutterstock
By Jo Savage, head of governance and regulatory, and Carolyn Roberson, business strategy director, Croftons Solicitors LLP
In light of the economic climate, value for money and the HCA’s consultation on changes to the regulatory framework, there has been much talk about whether the sector is likely to see more mergers.
In March 2014 Moody’s was quoted in the press saying that it “expects mergers to become more prevalent in an environment driven by falling grant levels, reduced bank lending and an increased need for funding from the capital markets”.
In addition to these factors, however, are the considerations of HCA regulation, including value for money and the proposed regulatory regime whereby RPs will need to be ever more aware of risk and mitigation, in an increasingly more complex and diverse sector.
The sector is arguably being driven to diversify in a bid to increase income to assist development programmes and achieve savings, as Moody’s says, in an environment where grant levels and lending appetites are reduced. As part of this diversification, RPs are still discussing merger proposals.
The initial consideration is always, why merge? There are many reasons to consider a merger, even more so in the current climate, however a proposed merger should firstly regard the cultural fit of the potentially merged organisations. Cultural fit will depend on a number of factors, such as geographical spread, property types, future plans, ethos and objectives. Once cultural fit has been established, it will be important to decide whether merger (in the traditional sense) is optimal for both organisations or whether other options (explored below) may be more suitable.
Needless to say, alongside all these considerations are the policies, procedures, documentation (e.g. tenancy agreements), and business priorities of each merger partner which need to be examined and re-evaluated. Will both parties’ existing development schemes and budgets proceed or will they be reviewed? What is ‘core’ vs ‘non-core’? The considerations go on and on.
Any merger should have a strong business case; what are the benefits of a merger? Will 2 plus two equal 5?
Weighing up the pros and cons, we urge Boards and executive teams to consider whether the perceived benefits of a merger could be achieved by different means or only through merger. The cost and time involved in merging (or indeed acquiring any business) and then integrating people, policies, systems, cultures, business plans, processes and outputs should not be under-estimated. Perhaps the benefits could be achieved by changes in a group structure, setting up joint ventures, acquiring a smaller RP, or indeed merging into a larger RP. Only when all options are analysed should the case for merger get the green light.
Once this decision has been taken, the hard work really begins! The benefits to tenants is a primary factor; it has been said in the press that tenants (whilst consulted) often feel they do not reap any benefits in a merger situation, although often the benefits are indirect, such as achieving economies of scale, improved governance and increased investment. Never over-communicate as they say!
For boards, a merger will bring about a change in governance arrangements in a new organisational structure. We urge Boards to ensure the merger negotiations are properly resourced and accountable – e.g.: a team(which will include the board ultimately) is set up to lead the merger, having a handle on the whole process and ensuring that robust due diligence is carried out. The team will need people with different skills and sub-teams (e.g. communications, financial, legal etc) may need to be created.
The overall team must also be prepared to be bold enough to pull the plug if the due diligence reveals potentially negative insight which could prevent the merger achieving its potential. A merger should not proceed for the sake of it, or because it has already gone so far down the line. A merger is a team effort involving all of these different strands; the right team can aid the smooth running of a merger and ensure that it is indeed the right decision.
In parallel to the due diligence and ‘business’ phases of the merger process, time and effort needs to go into communications and integration planning. Communication is key, with the boards, staff, stakeholders (tenants, funders etc.) media, suppliers and consultants.
What will the merged organisation be called? What ‘brand value’ exists within the various parties involved in the merger? How will this be captured? What needs to change? How will the merger be communicated? What key messages will be critical to the success of the merger? What will be the impact on the merger partners’ staff? Will it be ‘business as usual’ or will merger bring change? Over what period of time?
In our experience, a well-planned negotiation process can make the difference between a merger’s success and failure and enable value for money (vs wasted time/money) be evidenced.
Regulation and value for money
In relation to the HCA’s proposed new regulatory framework and its value for money standard, a merger could, in the right circumstances, ensure compliance. This could be achieved by enhancing board and management skills, homing in on risks and mitigation strategies, achieving savings, streamlining procurement processes, enhancing access to bank or other funding and operational efficiencies.
Any organisation considering a merger would be well advised to take heed of the HCA’s consultation, as it will impact on the due diligence required and go some way to complying with the revised standards in advance of expected implementation in April 2015, particularly in relation to assets and liabilities registers and risk management. The HCA’s revised framework may in fact assist the due diligence process in the future, making mergers (or indeed any group structure arrangements) simpler.