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The ‘Merger’ word…

Posted: 10/12/2021


The word “merger” can divide opinions, particularly in the boardrooms of housing associations across the country. Some see merger as a positive force for change, whereas others see it as a threat to their independence and the ethos of community-based housing associations.

Wherever you may sit on that spectrum of opinion, the reality is that consolidation within the sector has been happening steadily (and in some cases not so steadily!) over the last 15 years or so. The latest Value for Money metrics report published by the Regulator of Social Housing shows that 47% of the sector’s total housing stock is now owned by providers with 30,000 or more units, compared to 36% in 2018.

Having acted on both housing association mergers and demergers, we have seen the happy marriages and the (thankfully!) amicable divorces. We’ve set out below our five top tips for a successful merger.

Getting the “why” right

There is increased scrutiny from stakeholders around mergers, as well as a growing need for those organisations who have publicly listed group members to disclose participation at an even earlier stage. This means it is more important than ever to have a clearly articulated business case for merger linked to your organisation’s strategic objectives.

Part of this requires robust and honest scrutiny of your own organisation’s strengths and weaknesses, as well as a clear narrative around its history, background and achievements. Documenting this will assist in the process of getting to know potential partners and help you to be realistic about what additionality could be achieved through coming together.

When you are building a business case for partnership, it is important to be clear from a strategic perspective what your drivers are. You should be honest about what you can offer to a partnership and also about what you would seek to gain, and the board should be clear on this from the outset. Organisations can often underestimate the drain on resources and energy that projects like mergers can involve, as well as how unsettling they are for staff and stakeholders. To offset that cost, you must be clear that any merger proposals could achieve genuine benefits for your organisation and its customers at an early stage.

Any good business case should include realistic consideration of the resident voice. Many organisations considering merger have found ways to include residents in the process. Consultation should not just be seen as a ‘tick box’ and the impact of merger should be considered carefully.

A clear process for meaningful consultation must include adequate time for it to take place and to be formally considered by the governing bodies. The formal consideration should take account of all relevant feedback and fully consider any challenges to the proposals before a decision to proceed (further) is made. Any agreed actions arising from the process should be recorded and taken forward.

Never underestimate the importance of culture

To quote Pete Drucker, “culture eats strategy for breakfast”, yet even now in many mergers the importance of testing ‘cultural fit’ is underestimated.

Due diligence in mergers mostly (and rightly) focuses on the tangible matters of financial and legal due diligence, whilst the less tangible matters are too often given less focussed and structured attention. From our experience, it seems that many failed mergers (those that did not happen) are due to a lack of a cultural fit between the two parties, leading to poor engagement, misunderstandings, lack of trust and ultimately a breakdown in the relationship. This often happens after quite a lot of time, money and energy has been invested in the process to date. It can then lead to lost opportunities (current and future), reputational damage and, as it wastes resources and energy and it also takes focus away from the ‘business as usual’, have a negative impact on organisational performance.

David Tolson Partnership (DTP) is experienced in performing cultural due diligence in mergers. The analysis can help to show differences between organisations and their cultures and management styles, which whilst often not significant enough to lead to a breakdown in talks, can highlight important matters that need urgent attention. This is particularly the case when developing all important and often over-looked ‘post-merger integration plans’, which need energy and consideration well before the ‘legal’ merger takes place.        

Aside from the formal assessment of cultural fit, it cannot be stressed enough how important it will be to carefully engage and communicate with people at all levels. Often a project can progress extremely well, with good teamwork and engagement from officers, progressing a robust business case. However, if board members (collectively and individually) are not engaged positively and effectively, differences and tensions can grow, potentially causing even the most robust business cases for merger to collapse through a lack of a combined and joined-up vision.

Doing due diligence well

It is usual for legal and financial due diligence to be undertaken (sometimes in-house, but more often by specialist advisors) once heads of terms (or a Memorandum of Understanding / Statement of Intent) have been agreed. 

It is good practice for the process to be managed by a joint project team, sometimes with a central external advisor/facilitator. The joint approach can achieve greater consistency in approach and reporting, which ties into key concerns or issues that are relevant to the overall merger business case.

Due diligence scopes should be tailored appropriately to fit identified risk areas in the merging organisations, to ensure they provide a useful intelligence tool in supporting the business case for merger. Scopes may differ for the partner organisations, such as where a smaller provider is joining a larger one, or where there is a focus of business for one provider that may pose a material level of risk. However, a joint approach to managing the due diligence process can help to ensure there is a consistent approach (such as to levels of materiality) and that if issues do arise, they can be considered in context and against the overall business case. This all helps to maintain the spirit of partnership.

It is rare for a completely ‘clean bill of health’ to be issued after due diligence. It is important for the matters arising to be jointly understood and for a joint ‘due diligence action plan’ to be established and acted upon, led by the board and executive team. Whilst legal and financial analysis mostly takes centre stage in merger due diligence, it is becoming more common for other areas to be separately examined as well. These often include property (asset focused) due diligence and, in recent years, focussed health and safety due diligence, sometimes with additional independent assurance in key risk areas.

Planning for predictable surprises

Mergers require detailed planning to be delivered on time and in a smooth and successful way. A comprehensive project plan should be closely managed and overseen by a joint project team, steered by a joint committee of board members. A number of ‘predictable surprises’ need to be carefully managed and sufficiently addressed in the business case for merger, including engagement with funders and engagement and consultation with any shareholders. Securing funding consents (and engagement with funders generally) can often be a lengthy process and so early engagement is helpful.  

Issues that have arisen from recent mergers have included disputes with unions (as seen on the recent Riverside Housing and One Housing Group merger) and referrals to the Competition and Markets Authority (CMA). Consideration of such issues should be included at the very outset. For example, would a self-referral to the CMA help to reduce the risk of the merger timetable being disrupted at a later stage?

Another reality of recent mergers is the need to disclose discussions at an earlier stage, due to the requirements of the Disclosure Guidance and Transparency Rules (where associations have listed debt). We have seen this with some recent potential mergers being cited in the housing press as having “fallen over”.

Going the distance

Our role as project advisors can be akin to that of a midwife, delivering the new ‘baby’ and then leaving the ‘parents’ to do the hard work! However, planning for how you wish to bring up that new ‘baby’ – or the post-merger integration – should be started early in the merger process. You should put significant effort into planning, which involves joint working and detailed engagement with all parts of the two businesses. Delays in achieving effective integration (for example through IT issues or from silo working) can prevent merging organisations from delivering the benefits outlined in the merger business case, and therefore undermine the key part of any successful merger – the ‘why’.

This article has been co-written with Andy Roskell, managing director at DTP.


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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP