Mergers must move with the times

Since 1976 more than 500 housing associations have been taken over. These have mostly been very small associations or those forced to merge through financial difficulties and regulatory action. The biggest waves of mergers were associated with the 1974 Housing Act, which marked the end of largely voluntary effort, and the 1988 Housing Act, when private finance threatened many smaller associations. Surprisingly, the late 1990s did not see an increase in the level of merger activity, but there was an increase in the size of associations involved and in the complexity of new organisational structures. Group structures emerged as a popular response to tax changes, stock transfers and diversification of activities. Only three of the groups formed between 1994 and 1998 involved fewer than 2,000 homes.

Pressures to merge are all too familiar - rent regulation and pressure on income, performance pressure on costs and quality, the critical mass needed for industry standard innovations such as call centres and to negotiate competitive interest rates. There is the inevitable challenge of seeking new ways to spread costs and achieve economies. Geographical expansion and geographical consolidation have been two contrasting drivers for recent merger proposals; consolidation may have a closer fit to current policy agendas.

Most discussion of RSL mergers and group structures has been remarkably insular. We should be learning lessons from the latest outbreak of merger mania in the private sector, where mergers completed globally in the first six months of 1999 alone were equivalent to 50 per cent of Britain's GDP. Perhaps the most startling finding from studies of private sector mergers is that in between a half and three quarters of cases shareholder value is not increased by merger, for example one McKinsey study found that only 23 per cent of acquisitions even recovered their set-up costs. Closer to home is the experience of non-profit sectors other than housing. Here the non-distribution constraint means that there can be no hostile takeovers, but coercive action by funders and regulators has often been a significant driver for some of the least successful voluntary sector mergers.

Experience in other sectors suggests that waves of mergers are often associated with external disturbances, in for example regulation or the market. But the key to understanding merger activity lies in the strategic choices made by organisations themselves. The Housing Corporation's requirement for a business case for merger helps RSLs to be explicit about their strategic choices. However, stated benefits such as lower rents and overheads, stronger boards and reduced risks must be worked for. The concept of "organisational fit" underlines the need to consider how the cultures, systems and resources of the merging organisations will blend together after merger to deliver (or fail to deliver) the benefits.

Another important lesson is that the "business case" will often be less important than managerial motives. Managers (and boards) may be driven more by growth than by profit. Empire building theories stress the correlation between organisational size, and the real motivators such as managerial salaries and organisational prestige. While Housing Todays' salary surveys may cast doubt on correlation between size and salary, "how many units have you got?" is still a common opening gambit between board members striking up a conference conversation. Conversely, the absence of hostile takeovers means that RSL mergers are unlikely to proceed unless they are in the interests of senior personnel- analysis of the age profile of the current cohort of chief executives might provide a useful PI for predicting future merger activity!

Other important human factors are the sensitivities arising from the nature of mergers. After all no-one wants to be taken over! Many RSLs are looking at more limited partnerships such as joint ventures and service level agreements to get the benefits of scale without the loss of autonomy involved in most group structures and mergers. This can lead to quite ambiguous proposals for alliances or step by step progress. One non-profit study warns that while ambiguity can assist in achieving the deal it can be a major disadvantage when it comes to realising post-merger benefits.

Studies of mergers often focus on the process of deciding in principle to merge, marriage broking and courtship and doing the deal. RSLs are lucky to have a detailed process map of their own. Partnerships and Practicalities is the National Housing Federation's guide for RSLs considering mergers and group structures. The extensive experience of partnerships by BME associations is also distilled in the Federation of Black Housing Organisation's publication Best Value in Partnerships stressing the importance of shared aims, trust and management of the process. Yet, despite these road maps it seems likely that the conversion rate of proposed mergers and groups to completion will remain low and RSLs will continue to spend significant time on eventually abortive deals. Absence of trust may be as important a factor as business case or cultural fit in explaining non-completion. There is certainly a suspicion about group structures where senior staff of the founding RSL have all moved upstairs to the parent leaving only subsidiary roles for the senior staff of potential new partners.

There is still very little guidance in the RSL sector on the crucial post-merger integration stages of the process, nor any evaluation of who really benefits from RSL mergers. These are the two areas to be addressed through case studies in the next stage of the CURS research.

First we need some criteria to define success. Corporation regulatory guidance now requires RSLs to set out the anticipated benefits of merger. To these may be added performance benchmarks and perceptions of key stakeholders including other service users, board members and staff. Ensuring that tenants are not adversely affected and that there are demonstrable benefits is now the key test for RSL merger managers.

Second, we must look for the critical success factors. In other non-profit sectors these have been pinned down to factors such as voluntary rather than forced mergers, shared vision, trust, leadership and sensitive handling of individuals. In a service sector business such as social housing, where asset stripping is (hopefully) not the aim, getting the benefit depends on staff motivation and understanding of the new organisation's goals.

Third, we need to focus on the post-merger integration stages when the game is won or lost. Lack of success in private sector acquisitions has been attributed to poor planning, lack of communication and mishandled post-merger implementation. Business gurus suggest that success requires a clear implementation plan focusing on strategic aims and cultural fit, managers who understand the impact of the plan on each existing employee, honest and consistent communication throughout the process and management of employee expectations. We hope to establish what works best in post-merger integration plans in RSLs.

Finally we recognise that the benefits of mergers and group structures may not emerge in the short term. Transaction and set-up costs, possible service disruption and dipping staff morale must all be managed to achieve medium-term benefits. Implementation plans and initial payback periods may be between two and five years. One RSL has taken a much longer view, seeing potential benefits from an asset management perspective over a 25-year period.

"No pain no gain" may be one way of describing the process of benefiting from mergers. But "adding value by valuing people" might be the RSL's secret weapon to unlock the potential which has so often eluded private sector mergers.