Mergers are a means, not an end

However, other drivers are becoming increasingly important, including skills retention and recruitment needs, and a desire to generate capacity to do more, including by investing in systems and IT. An aspiration to optimise impact and influence, particularly in light of the devolution agenda and upcoming local authority reorganisation, is also becoming more significant.

Recently there has been a wave of ‘rescue’ mergers/acquisitions, which have been essential to ensure the ongoing viability of some providers. Such rescues can have a temporary negative impact on the financial position of the ‘rescuer’ organisation, but the overall financial benefit of maintaining the status of the social housing sector as a ‘non-default’ sector should not be underestimated.

When done correctly, mergers can help to foster greater resilience for organisations to enable them to better weather financial and regulatory/legislative challenges. In addition to generating efficiencies and creating savings, a successful merger, when coupled with renegotiation of existing funding terms, can also create additional borrowing capacity, which may allow organisations to do more and be more resilient to future shocks.

However, a merger is not a solution in and of itself – they involve significant time and resource, and business as usual still needs to be delivered. The business case for a merger must be tested robustly and there needs to be realism about the levels of savings and overhead reductions that can be achieved, and how this might affect realising business case benefits. 

The board of the merged organisation should test whether the benefits of the business case are being delivered in reality and, if not, should ask why.

There has been general ‘grumbling’ in the sector as to whether the benefits of merger business cases are tested in reality. It is outside of the remit of the regulator to undertake such a role and clearly financial demands and circumstances will change over time which will impact on the ability to achieve all benefits.

Nevertheless, boards should ensure they test the delivery of integration plans and business cases for merger, with a clear rationale where anticipated benefits cannot be delivered.

With increased stakeholder scrutiny, including from lenders and the regulator, and further transparency requirements on the imminent horizon with the implementation of ‘social tenant access to information requirements’ (STAIRs), there has never been a greater need for due diligence on mergers to be done well.

It is now more common to take a more tailored approach to risk on due diligence, with greater levels of independent assurance around key risks – including health and safety compliance, stock condition, and IT and cyber risk.

Due diligence should be approached openly and not defensively – it is rare that no issues are identified. The impact and materiality of such issues should be tested against the merger business case, and a clear action plan put in place, with target timescales for delivery. These must be monitored and delivered pre/post-completion. 

“Due diligence should be approached openly and not defensively – it is rare that no issues are identified”

Due diligence can also allow the teams of the merging organisations to work alongside one another and highlight potential cultural integration issues that may need to be addressed as part of the integration plan. This helps to avoid undermining identified business case benefits.

A key component of the “bigger is not better” argument is the criticism levied at larger providers in relation to compliance with the consumer standards and, in particular, linked to high-profile failures around health and safety and complaints.

However, this argument is one-dimensional: large housing associations (of 35,000 homes and more) have obtained C1 and C2 gradings. Ultimately, culture is king – and mergers can help by highlighting previously unidentified weaknesses and unchallenged issues, while providing capacity to deliver change.

There is now a much stronger focus as part of ‘day one’ and integration planning for mergers on how the customer voice will be heard within a merged organisation. There needs to be real customer engagement as part of consultation on a potential merger, including in designing effective and meaningful customer engagement mechanisms as part of the merged organisation.

Ultimately, while not a panacea, mergers can be effective by providing increased resilience and further borrowing opportunities. However, to ensure the process is successful, associations must ensure that they carry out proper due diligence – integrating cultures and troubleshooting issues before they arise.

Gemma Bell, partner, Devonshires