Merger activity within the social housing sector has stepped up significantly over recent years and whilst 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. Whilst each merger will have its own individualisms, there are typically two reoccurring themes in the sector triggering the conversation, either: i. a Housing Association is financially stretched and would benefit from support; or ii. 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) often are 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.
If we consider the two main themes separately, let’s start with the Housing Associations that would benefit from support. Whilst 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 the Housing 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 Housing 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 organization. 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, 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.
Stepping back from the underlying rational, we must also be mindful that the sector has an extensive reliance on the capital markets for funding, with more and more housing associations having listed debt, in their own name. The price of these freely tradable instruments reacts to merger announcements in our sector as they do in any other sector and there can be financial consequences for investors. We do therefore need to be mindful of when and how mergers are announced, appreciating the impact it has on our lenders, once made public. Insofar as it is possible factors that can derail a merger, after it has been announced, should be limited to unknown details resulting from the in depth due diligence process.
In summary, I am a supporter of mergers within the sector when there is a clear rationale believing that consolidation can bring financial benefits, customer service improvements and allow Housing Associations to build more new homes. Indeed, I have worked on many mergers in both the private and housing sector and can reference some excellent success stories. That said, it is imperative that Boards and Executive teams fully understand the rationale for any potential merger, digging deeply into both the pros and cons prior to embarking on the journey.
If you have any questions or would like to discuss mergers in the social housing sector in more detail please contact the author of this article Lee Gibson – firstname.lastname@example.org, +44 7738 896501.