Small housing associations: mergers and

acquisitions
OCTOBER 2013

Who is this briefing for?

This briefing is for board members and senior staff of small
housing associations. It is relevant whether or not you are
currently considering a possible merger or acquisition. The
proper running of any business public or private sector
includes from time to time questioning whether the interests of
the business are best served by continuing as an independent
entity or by becoming part of something larger.
The briefing is about the questions you should be asking both
about your own organisation and about potential partners,
before you get anywhere near detailed negotiations. It is also
about the need to establish a clear, accountable and
transparent process for these decisions. It is not a technical
legal or financial guide; these issues are complex and you will
need appropriate specialist advice in these respects.

Why would you consider merger or acquisition?

If these considerations are currently on your agenda it is
important to be clear why. The different reasons for wanting to
make this kind of change have different implications in terms of
potential partners and most appropriate arrangements.
1

You are in financial difficulties

If this is the case you probably already have the regulator on

your back. In fact, unless you have a credible solution to the
problems (perhaps disposal of assets you know will sell, or the
ability to pull out of future commitments) it would be sensible to
make the regulator aware early. Informing them early may not
guarantee you a sympathetic ear, but informing them late
guarantees they will take a harder line.
If the regulator does decide you have to pursue a merger they
will probably have views on potential suitors. They may prefer
someone larger and well resourced, you might prefer someone
local and nearer your own size. Ask for their detailed reasoning
you can have a meaningful dialogue about this, but only on
the basis of facts and figures, not on likes and dislikes.
2

You need to be larger to achieve your aspirations

The first thing to check is whether your aspirations are clearly

identified and quantifiable enough to be able to test this
proposition. It may well turn out to be true but your decisions
need to be based on actual numbers, not just the
generalisation.
2 Small housing associations: mergers and acquisitions

It is about the
need to establish
a clear,
accountable and
transparent
process for
decisions

Capital finance is certainly easier and cheaper to raise on a

larger scale but there are plenty of examples around of smaller
associations coming together to share arrangements and create
the necessary scale. And it is simply not true that smaller
organisations cannot borrow on reasonable terms, if they have
a sound business plan.
It is also true that a larger organisation, given equal financial
fitness, can take on more risk. This is increasingly important in a
development environment characterised by low grant, sluggish
sales, higher rents and welfare reform. Equally importantly,
local authorities selecting partners for regeneration schemes
want to be sure that the partners they choose are big enough to
dig themselves out of any problems that arise and still complete
the scheme. All of that said, recent regulatory judgements
reveal an increasing number of larger associations running into
difficulties. Size doesnt solve everything. You may or may not
need to be larger to meet your key aims.
3

Everyone around you is getting larger and you need

to get involved to be taken seriously

This is not an uncommon prompt to consider merger

discussions but it is often one of the least well thought out
motives. Is your chief executive getting unnecessarily nervous,
feeling left out of the big time or seeing a personal opportunity
in here? Have you asked your stakeholders whether they think
any the less of you because your neighbours have
consolidated? A number of small associations see this process
as giving them a much stronger marketing position as they
become the only independent local presence left. That of
course brings with it the need to be happy working in that
particular niche but there can be plenty of work there.
4

You need economies of scale to survive in leaner

times

Arguments have raged over the years about whether larger

organisations are more effective or not in the long run. In the
private sector waves of consolidation and takeover are often
followed by periods of unwieldy groups being broken up
because their constituent parts are worth more separately. It is
true that a significant number of things can be done cheaper on
a larger scale but there are often downsides:
Frontline management: can be done with less staff and
fewer managers but at the cost of having a more
standardised offer, less local discretion and weaker local
relationships

3 Small housing associations: mergers and acquisitions

Size doesnt
solve everything.
You may or may
not need to be
larger to meet
your key aims

Maintenance: larger contracts on the face of it offer lower

unit prices but the gains may be compromised by the
cost of variations to meet unforeseen circumstances and
there have been some high profile examples of
contractors going bust
Development: being part of a larger scheme brings down
the cost of your properties but you may lose some
control over the specification and other aspects of the
scheme surrounding your properties
Back office: common areas of work to outsource but the
product can become impersonal and standardised. Staff
often find this quite de motivating.
5

You want to grow or diversify but development/new

business opportunities are limited

This is the concern that frequently results in a search for smaller

local organisations to bring into yours as an alternative to
merging with someone larger. Opportunities may include alms
houses, independent supported housing providers and social
enterprises perhaps employment or social care related
businesses.
The key to all of these is to be clear how they fit with your
business. You also need to do due diligence carefully. You
need to understand the risks you are taking on. Why is it that
they want to give up their independence and join you? Do you
have staff and board members experienced in any new line of
business you are considering? In general social enterprises
have income streams that are exposed to contracts being
terminated property related income is more certain even in a
period of benefit cuts.
6

You have operational capacity that you want to make

better use of

This might be because your direct labour organisation has

completed your Decent Homes work. It might be because a
systems review or new IT has made your back office function
more efficient. You might have call centre capacity spare.
This might well be a good reason to look to expand by merger
but there are two other options that you should also evaluate.
Firstly can you simply sell services to others without all the
other organisational change? Secondly would it be more cost
effective and less risky to simply reduce surplus capacity?

4 Small housing associations: mergers and acquisitions

Property related
income is more
certain even in a
period of benefit
cuts

Your chief executive is retiring

This always raises the question of whether you want to merge.

In reality there are several different issues that might be on your
mind:
Is their salary a significant cost that could be saved? You
then need to evaluate how well any new arrangements
will look after your organisation and the extent to which
overheads and other charges will erode the actual saving
Can you afford to recruit a replacement at current rates?
Worth testing this out as senior salaries are no longer
increasing as they were. Worth also checking whether
you are over specifying what you need your ideal may
be out of reach but someone perfectly acceptable may
not be
It removes a potential barrier/cost so now is the time to
consider it.
The last point is true whatever your circumstances, and you will
almost certainly receive a number of approaches asking if you
are interested in discussions. It might be tempting to ignore
these and push on with recruiting a replacement but if you can
keep your nerve it probably is a good time to explore whats on
offer.
Rather than just deal individually with approaches you receive
its worth thinking about actively approaching anyone you think
will approach you, and anyone youd be interesting in hearing
from. You can then set the ground rules and the timetable. You
also maximise the possibility of getting the most interesting
offers on the table. You may well still decide to do nothing but at
least you will know you havent missed anything better.
8

You want to review how best to take the business

forward

This really is the best scenario to be working in. It means you

are not under any pressure and can agree the process for
inviting interest, holding discussions and evaluating options.
You can be open minded, without a strong view for or against
doing anything in principle.
Be warned though, however well you explain your motivation
others may be looking for other reasons. Worth keeping
stakeholders in the loop on this although the more people you
tell the bigger wave you make, the biggest danger comes from
people who you dont keep informed and who then draw their
own conclusions.
5 Small housing associations: mergers and acquisitions

If you can keep

your nerve it
probably is a
good time to
explore whats
on offer

It really is all about you

One of the first things you should spend some time doing, if you
havent already, is identifying what it is that is special or unique
about your organisation. This is either the thing that makes it
important for you to remain independent, or its the thing that
you will want to ensure is protected and nurtured under any
new arrangements. If you dont know whats important about
your organisation, how do you know you arent staying
independent simply for the convenience of staff and board
members?
You might find it in your mission statement or in something that
sets out the values of the organisation. You might find it in your
strategic objectives or in the detail of local service standards. It
might be how you involve tenants or the communities you work
in. It might not be written down at all.
Once you have agreed what it is, there are two other important
steps to take:
Firstly find out what other social landlords around you
identify as their defining character. Do this by looking at
what they say about themselves and if possible by
discussing it with their staff or board members. You want
to find out what their perception is, not what you think
about them. Use the process to challenge your
preconceptions about your friends and rivals. You may
well find at the end of this that what you have in common
is greater than that which differentiates you. Either way
you will have a better perspective on your own
contribution
Secondly find out what your stakeholders think your
defining virtues are. The best way to do this is by
commissioning an independent stakeholder survey, but if
you have the right relationship and know who to ask (not
always the boss or the chair of housing) you can get
honest feedback direct. Do they recognise the same
things as you have identified and do they place any great
value on them? If the answer to either of these questions
is no, it should give you some pause for thought.

The question of structure

If you are going to bring organisations together you need to
decide what structure best suits your needs. There are a host of
important technical questions here, including charitable status,
VAT groups, type of legal incorporation and the variety of actual
governance structures that can fit within particular legal
6 Small housing associations: mergers and acquisitions

Whats
important about
your
organisation
might not be
written down at
all

structures. This paper does not attempt to deal with these but
instead looks briefly at the key issues with the two basic
options:
1

A single organisation

This is the simplest solution and the one most likely to achieve
potential savings and avoid duplication. The downside is that
the smaller organisation may feel swallowed up, or that with two
similar sized organisations one feels the new organisation has
lost focus on something important.
This makes early agreement about future priorities and the
governance and staffing structures that are going to achieve
them really important. Everyone needs to have a clear picture
of the role and value the work of all the constituent parts has in
the new organisation.
It is possible to give considerable operational autonomy to parts
of a single organisation (in a way ALMOs are a good example
of this). It is also possible to create (or retain) very strong local
brands within a single organisation which can be very important
for customers and stakeholders. Creating separate governance
arrangements, central services or delegation of investment
budgets is also possible but rarer and there needs to be a
strong justification for duplicating or splitting these functions up
in a single organisation. It happens most often in very large
organisations with a wide geographical spread.
Ultimately the reality is though that once the deal is done, there
are no checks and balances left for the original parties because
they have become the new organisation.
2

A group structure

This is where you create a parent with subsidiaries. Most often

the parent will hold the main assets in particular the properties
and the subsidiaries will run operations. There are always a
set of checks and balances that mean the parent has sufficient
control to be (and be held) responsible for the overall
performance and compliance of the group and the subsidiaries
are guaranteed a degree of independence and influence.
It is possible for subsidiaries to retain ownership of the assets
but this makes it harder to achieve financial economies of scale.
Investment decisions are most commonly taken at parent level
albeit often within previously agreed guidelines as to priorities
and the basis for distribution. Central services tend to be
provided at parent level but often subsidiaries retain a level of
expertise sometimes based on the protection of previous
staffing establishments as much as anything else.
7 Small housing associations: mergers and acquisitions

Once the deal is

done, there are
no checks and
balances left for
the original
parties

With a group the original parties continue to exist. The

downsides are governance complexity, the potential for
expensive duplication and potential under achievement of
economies of scale. Even worse there is the danger that
subsidiaries resent the parent or see themselves as in
competition with each other. The best groups maximise local
autonomy of delivery but also maximise the consolidation of
central services and create a single management structure.
Which is best? It depends on your circumstances. In principle,
having a single organisation is simpler and likely to be more
cost effective. In the real world however many organisations
which want to achieve the benefits of coming together with
others are not ready to surrender their identity completely. This
is why group structures have become so popular they
facilitate mergers which would not otherwise happen.
It is not insignificant that a number of groups have collapsed
their structures in recent years to become single organisations.
Furthermore, if it were not that in the current lending climate
changes of this sort tend to result in the repricing of existing
loans, a considerable number more would have followed suit.

The question of process

If you start, as some local authorities looking to transfer have,
knowing that you want a competition to select a partner, you
have an open process from the start. Quite often though
organisations have concluded that it is worth seriously exploring
merger on the basis of informal and off-the-record
conversations. Clearly in this scenario, opening up to
completion is unlikely. That said, just as in the private sector,
once their intention becomes public other potential partners will
try, sometimes successfully, to gatecrash the party.
In our view the more open, transparent and inclusive the
process you follow the better. This is for three reasons. Firstly
you will achieve a better and more enthusiastic sign up from
staff, tenants and board members if they feel they have been
involved in the process. Secondly the more pairs of eyes and
different perspectives you have looking at the deal the more
rounded a picture of your intended you will get. Thirdly,
although some issues especially around appointments and
terms and conditions are confidential, it needs to be clear that
a proper process is in place for deciding them. Confidential
decisions are still accountable decisions and just as the chief
executive is accountable to the chair, the chair needs to be
accountable to someone. That might be the chairs(s) of audit or
remuneration committees if you have them, or it might be the
whole board.
8 Small housing associations: mergers and acquisitions

The more open,

transparent and
inclusive the
process you
follow the better

Some of the key elements the process needs to cover are set
out below. The list does not set out to be comprehensive.
Due diligence
Your advisors will carry out an independent audit of the
liabilities and risks sitting in the organisation you are
considering joining. Given recent experiences in the sector you
would be best advised not to rely on this alone. In terms of
development, what contractual commitments exist now or will
do before any deal is done? Do you have a full understanding
of any non-social housing business they are involved in? Any
financial instruments or complex loan deals? Any long term
service contracts and penalties?
Business case
Although work on this is always technically complex and full of
figures and assumptions, it is absolutely crucial that you break it
down into arguments that a non-financial person can
understand. How and when are any savings going to be made?
What are the set up and integration costs? What is the
evidence about future business prospects? What is the
evidence about how stakeholder will view the new
organisation?
A further reason for getting this clear is that the financial
synergy between the organisations will continue to have an
effect on your future opportunities and constraints. The people
you like and can work with may leave (sooner or later quite
likely), the culture may change (possible but less likely) but the
shape of the business will change slower unless you decide to
be radical.
Culture
Do we get along with these people? Do we think alike and have
the same values? These questions are important but they are
elusive. You wont really know until you are trying to make
difficult decisions together. So recognise its importance but
dont let it become the dominant factor to the exclusion of
others.
The process of exploring how compatible cultures are can
however lead to a set of valuable conversations and give
participants an open agenda in terms of what they talk about.
When board members, staff and tenants are talking to each
other informally they will often reveal things that are not in the
official version. Capture this information and take it seriously.

9 Small housing associations: mergers and acquisitions

The business
will change
slower unless
you decide to be
radical

Structure
From the basic decision about what structure to adopt you will
move into important detailed discussions about how it will
operate: number and selection of board members, delegation of
authority, etc. As with the business case, dont get lost in the
detail as there are important issues in here, particularly about
how investment and staffing decisions are to be made.
Integration issues
At some point in the process you will need to look at how
services to tenants and terms and conditions of staff compare.
From there you will need to decide how far you will make them
uniform, and on what terms. You will also look at issues about
the IT system and how central services are to be integrated.
Its helpful to find out early if either party has any aspects of
these that they are reluctant to compromise on, although they
generally dont turn out to be deal breakers.
The three wicked issues: Who will be chair? Who will be
chief executive? What will we call it?
This bullet point should perhaps be much further up the list as
these are the questions that most often cause angst and
conflict. The earlier you deal with them the better. If you are
lucky there will be obvious solutions to these questions that
everyone can sign up to. If not this is the earliest time you need
to establish a credible joint decision-making process. Either way
its important that the first two are not simply decided by the
chairs and chief executives and signed off by everyone else,
they are more important decisions than that.
Head office location
This can be a difficult decision depending on the geography and
on the merits and costs of the actual options open to you.
Stakeholders can be sensitive to this. Especially local
authorities, even though in reality it might make no difference to
the service whether you stay within their boundaries or not.
Tenants are likely to be more concerned with what their local
operational contact arrangements are.
Stakeholders
It is really important to have a communication plan for
stakeholders throughout the process. Find out what their views
and concerns are. Explain what is happening and why, explain
how the changes will improve your service and commitment to

10 Small housing associations: mergers and acquisitions

You will need to

look at how
services to
tenants and
terms and
conditions of
staff compare

them. If you dont actively send out these messages there is a

real danger that they will feel you arent bothered about them.

Conclusion
Housing associations have been steadily increasing in size for
decades for three basic reasons. Firstly they develop more
properties, secondly the entrance of stock transfer landlords
into the sector and thirdly mergers. Right now we seem to be
going through one of those periods when merger activity is on
the increase. None of this means that it is necessarily right for
you.
Our biggest piece of advice would be not to be afraid of the
question. Be clear who you are and what you want to achieve
and then consider what the best way to achieve that is, on the
basis evidence rather than sentiment.

11 Small housing associations: mergers and acquisitions

Be clear who
you are and what
you want to
achieve

Help from HQN

We hope this briefing helps you a lot. You might find our brand
new governance toolkit helpful too. Download your copy at
http://hqnetwork.org.uk/governance_toolkit
If you want any more assistance do please contact HQN.
We work for lots of boards and senior staff just like you at
associations and ALMOs.
Our work includes:
Board recruitment and appraisal
Executive recruitment (permanent and interim)
Governance reviews
Board member coaching
Training on the responsibilities of board members
Training on regulation, health and safety and effective
team work
Strategic briefings
Away days (these can be based on the questions and
exercises from this toolkit)
Stakeholder surveys
Reviews of standing orders
Mediation.
Please contact Anna Pattison HQN on 01904 557197 or email
anna.pattison@hqnetwork.co.uk for more information.
Have a look on our website for the latest updates
www.hqnetwork.co.uk.

12 Small housing associations: mergers and acquisitions