Small number of mergers shows the sector is “slow to respond to financial and environmental challenges”
Charities are still not embracing mergers to survive and thrive – despite challenging fundraising and funding conditions.
Last year, 81 mergers took place in the UK charity sector – just a small increase on the 70 that took place in 2016/17.
To place this in context, this is in a sector with 168,000 registered charities.
The figures were reported in the latest Good Merger Index, published by social sector consultants Eastside Primetimers.
Report authors said the small number of mergers showed the sector is “slow to respond to financial and environmental challenges”.
It found that 59% of charities that were acting as the acquiring partner were in position of financial surplus as they undertook their merger, with an average profit margin of 3%.
However, among organisations being taken over or engaging in merger with a similar-sized organisation, 57% were in deficit and the average operating margin was -17%.
These figures suggest that financial hardships are a significant driver of the mergers that do occur.
In fact, takeovers dominated this year, as opposed to mergers of equals.
Takeovers represented 69% of mergers in 2017/18, up from 56% in the previous Index. True mergers of equals represented only 21% of mergers in 2017/18, down from 29% the previous year.
The big question is why there are not more mergers, given the difficult external environment.
Some third sector groups, such as the New Philanthropy Capital think tank, have been saying that mergers are the way to go for the sector – especially in areas where there are multiple small charities fulfilling the same role.
The Merger Index showed that infrastructure bodies that provide funding, support or representation for frontline charities represented 11% of mergers in 2017/18 – despite their crucial role in assisting the sector to raise funds and innovate in trying times, these organisations themselves can face challenges and are seeking to respond to them.
Authors of the report also found that in the medical charity field, mergers can reduce competition for funding and pool research efforts. These accounted for 10% of 2017/18 mergers, including the merger that formed Versus Arthritis, the third largest deal of the year.
The largest mergers were in the English sector, which is in line with scale. The biggest was between the social care charities Choice Support and London-based mcch, with £69.5 million worth of assets transferred, almost twice that of the second-largest merger, between CGL and the collapsed charity the Lifeline Project.
Mergers of Arthritis Research UK and Arthritis Care to create Versus Arthritis and of the Shaw Trust and Ixion Holdings were the only others involving the transfer of more than £10m of assets.
Report authors said that charity managers and boards should take on regular examination of merger and collaboration as a duty, and that a “merger code” is needed to provide a framework.
Richard Litchfield, chief executive of Eastside Primetimers, said: "Although these findings continue to show a sector slow to respond to financial and environmental challenges, we have found exciting examples of successful mergers and change among, for example, medical sector charities that are combining research efforts or bringing research and support expertise together in one organisation."
