Mergers – more, bigger, better?

Greg Campbell 9 March 2016

Why are we talking about (more) mergers?

• VFM expectations and pressures

• 1% annual rent cuts mean 13% less rent income than planned

• Business plans getting close to the edge

• Development grant slashed - now mainly for ownership

• Clawback of RCGF on the cards?

• S.106 ‘dead in water’ – has provided one-third of HA rented homes

• National Living Wage pressure on low-wage low-margin care

• Government prodding for reduced numbers of HAs – or in the meantime at least fewer CEOs

• Housing needs increasing – and Government is pushing for more supply

Coping with spending cuts - three stages

1. Staffing reductions and quick-win efficiencies

2. Business transformation, new Target Operating Models, shared services

3. Mergers

Where are more mergers likely to feature?

• Care providers struggling with National Living Wage and low margins

• Supported housing providers concerned about rent cuts and the LHA Housing Benefit cap, and in difficulties with contracts

• Recent undiversified stock transfers whose BPs are now problematic

• HAs still viable but no longer able to deliver/demonstrate USP

• HAs that have always been looking to grow

• HAs seeking to keep up – and seeking greater financial capacity

• HAs that want to reduce reliance on government, LAs, contractors - even the market - to maintain momentum

Mergers doubling in number?

Is merger always the answer?

• Are there realistic alternatives that deliver what you need?

Greater capacity

Cost savings

Access to specialist services and support

• The options -

Ourselves alone

Joint working and partnerships – development consortia, joint procurements etc

VAT cost-sharing groups

Shared services vehicles

Joint ventures – including potentially cross-sector, e.g. with LAs, ALMOs, commercial firms

The Merger Code

• Adopted by NHF December 2015

• 10 principles:

1. The board’s role is to act in the best interest of the organisation

2. The board should review its purpose and values

3. Where opportunities emerge the whole board should be informed

4. Decisions on merger/group structures or partnerships must be

presented to and decided upon by the board(s)

5. Boards should have or have access to specific skills and experience

The Merger Code (continued)

6. No board member or executive member should frustrate the due

consideration of a first stage proposal by the whole board

7. The board’s decision on a first stage proposal should be documented

and communicated to the other party in writing

8. Once the first stage proposal has been agreed in principle, a process

and timetable for next steps should be agreed by both parties;

9. An outline business case should be prepared

10. Declaration of an organisation’s adoption of the code should be made

in annual statements

So is this a big deal? Is the NHF ‘pushing mergers’?

Or is it a statement of what might be seen as normal good practice?

Can mergers deliver efficiencies?

Merger Size of new group (units)

Projected Savings

over 5 years (£m)

Projected additional

costs over 5 years (£m)

Net Saving (£m)

Savings unit/year - 5 year average

North East 32k 37.8 5.2 32.6 £204

Midlands 14k 11.8 3.2 8.6 £122

London 0.9k 1.6 0.4 1.2 £291

South East 23k 23.8 5.9 17.9 £153

North East 17k 6.0 2.0 4.0 £48

North West 13k 13.9 8.1 5.8 £91

But delivering a merger isn’t easy

How do you get it right?

• Be clear what you’re seeking to achieve - from the start

• The four ‘fits’ – strategic/financial, geographic, culture, people

• Confront and address the showstoppers – loans, pensions, IT etc

• Effective resourcing and communications –

Avoid service hiatus

Make sure people know their future sooner rather than later

Line up your internal and external teams

• A programme that allows time for planning and implementation

• …but avoids undue delay and drift

• Don’t stop at the point of merger implementation! – rationalise, review, ensure common systems, simplify structures, consolidate

How do you get it wrong?

• Lack of strategic focus and direction – from Board and Executive

• Failure to tackle potential dealbreakers from the outset – name, top jobs, financial icebergs, lender consent, IT systems, performance issues, culture issues, stakeholders and shareholders

• Allowing the ambitions of a few to sidetrack the many

• Underresourcing the project - merger/grouping will take more time and energy than you expect, even when you take that into account!

• Performance is allowed to dip – the two year implementation hiatus

• Good staff are not kept on board and leave

• Weak communications – and the rumour mill takes hold

Learning from elsewhere

Source – King’s Fund, September 2015

Greg Campbell

greg@campbelltickell.com

020 8830 6777 or 0793 048 0244

www.campbelltickell.com

@CampbellTickel1