Lack of mergers show sector's reluctance to form alliances, report finds

Takeovers are more common among the charity sector than ‘mergers of equals’, showing a reluctance for charities to form strategic alliances, a new report has revealed.

Eastside Primetimers’ Good Merger Index 2017/18 has revealed a steady increase in the number of new charity mergers, but the overall amount relative to the size of the sector remains small.

The fifth annual index found 81 mergers took place in the year 2017/18, compared to 70 in 2016/17. This equates to under 0.05% of all 168,000 charities in the UK.

Of the transactions that took place, 69% were takeovers (an increase of 13% from last year). Subsidiary models accounted for 7% and asset/service transfers and group structures accounted for 1% respectively.

The research found the quality and rationale for mergers continues to be an issue, with the average profit margin as a percentage of turnover for transferee organisations standing at 3%, while for the average transferor organisation this was -17%.

Despite the familiar sector theme of using mergers as a strategic tool, these figures show that financial distress is still the key motivator for charities considering whether to merge, the report claimed.

It found takeovers were likely to be more popular as a result of one of the partner’s financial weakness, but enticing because the charity being acquired is still able to play a crucial role in retaining frontline services, which may otherwise have been lost.

Two key ‘hotspots’ of merger activity highlighted in this year’s Index include national medical charities (10%) and infrastructure bodies (11%), with both areas demonstrating that the combined value and productivity of strategic mergers can be significantly more than the sum of their separate parts.

“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 amongst, for example, medical sector charities that are combining research efforts or bringing research and support expertise together in one organisation” Eastside Primetimers CEO, Richard Litchfield said.

The combined income for all 154 organisations involved in transfers in 2017/18 was just under £1.3bn. The biggest deal was the formation of the Partnership Support Group (PSG) from the merger of Choice Support and mcch, with a combined income of £69.5m.

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