Survival of the fittest

As more charities appear on the market, providing similar services and targeting the same donators, some are feeling the pressure to merge. Emma D'Souza reports on how only the strong can survive

Darwin's theory of evolution may well apply to charities, which are ultimately competing against each other for funding. Obviously, with insufficient income, as with any other organisation, there is a limit to what a charity can achieve. For the fit to survive, consolidation by merger may be the only option.

The Charity Commission says: “The Commission continues to encourage cooperation among charities where this will improve services or will result in a more economical use of resources. Cooperation can take many forms from informal networks to full-scale mergers. Different forms of cooperation will be appropriate in different circumstances.”

Mergers in the charity context are very different to mergers in the corporate sense. It is important to be clear about what is meant by the word “merger”. Moira Protani, partner and head of the charities group at SJ Berwin explains that the word can mean a number of things for charities and the fundamental starting point in any discussion is the charity's constitution.

A merger can take different forms. Two entities could join together to produce one, in which case one body is inevitably wound up and transfers its assets to the other. Alternatively, two organisations agree to set up a new company, to which they both transfer their assets. But Protani says that not all mergers are a transfer of assets, there are in-betweens. One entity may undertake identical activities to another charity and transfer these over, or one charity could become a service provider to the other in respect of their common areas of operation. In any event, Protani has noticed that her clients are increasingly asking about mergers.

With the talk of how popular mergers are becoming, the question arises, what are the motivating factors for charities to merge? Cost-saving is the most evident reason why charities decide to pool their resources. Charities are also competing for donations and despite new tax incentives for gifts, Emma-Jane Weider, associate at Allen & Overy, says that the UK is “far behind the US – Americans give seven times more than we do per household”. Therefore, mergers can be important to maximise revenue where a number of charities are reliant on common sources for funds.

Simon Weil, head of the charities group at Bircham & Co, says that many mergers are of charities seeking to achieve economies of scale and that usually they are a measure of desperation by one charity in financial straits.

Where charities have the same or similar objectives and are competing for funds, they may decide to join forces. An example is where there is a proliferation of charities operating in a very specific area. Not only can this cause confusion for the general public wishing to make donations, but the smaller organisations may not have the resources to achieve their objectives.

Patrick Stewart, company secretary at the British Diabetic Association, says his organisation is careful not to duplicate what another charity does. If duplication does arise, then it will seek not to do it.

Although Sally Weatherill, deputy company secretary and solicitor at the Cancer Research Campaign, says that mergers are of particular relevance in the cancer research field, it is not an issue of great significance for her organisation and it happens “as and when the opportunity arises”.

And charities do not yet seem to be embracing mergers when economic difficulties first arise, according to a recent survey by Charles Russell.

Paul Voller, partner at Bircham & co, says there “are more mergers about and a greater awareness of the opportunities to make efficiency gains”, but there are not as many mergers taking place as some would believe.

The reason for this, according to Voller, is that there are not the right drivers. When pushed to the edge of the precipice with no choice but to take action, people often decide to merge, but Voller believes that if there are many opportunities and insufficient pressures, people are not motivated enough to take the steps towards merging. Commercial factors are another driver, including the lack of pressure provided by the shareholder function in companies. Voller says that where there are no shareholders pressurising a charitable organisation to perform, there is sometimes no impetus to move forward.

Trustees are also very often an obstacle to merging. Voller cites prestige and personal enjoyment as part of the reason for becoming a trustee. The reduced board of trustees after a merger is, therefore, a disincentive for trustees to merge. These personal objections can be avoided where there are members pressurising an organisation to achieve maximum efficiency. Voller says that in the merger he is currently acting on, the organisation's subscribers are akin to company shareholders directing the trustees towards amalgamation.

Elizabeth Cairns, sole practitioner and charity expert, says that many individuals running charities value their independence, and mergers are usually “forced on charities due to financial difficulties or loss of funds”.

Michael King of Stone King agrees. “If people are enthusiastic enough to set up a charity, they think their vision is different,” he says. Therefore, he adds, mergers tend to happen only when a charity is in financial difficulty. After acknowledging that this individual flair and spirit is part of the reason that some charities are reluctant to merge, King is keen to point out that he is involved with a number of partnerships and joint ventures between charities, which are alternative ways of cooperation.

Hive-offs are, however, more common than the antithetical merger in King's experience. He compares them to a separate activity or cost centre being “launched from the mothership and being sent off on its own”.

For those charities that have achieved critical mass, the attraction of a merger dampens. Oxfam has recently been involved in a demerger of its operations in England, Wales and Scotland while the British Council's legal adviser Stuart Garland explains that because of the global nature of the organisation it “tries hard not to split the atom”.

Collaboration is an extremely significant form of cooperation between large charities according to Joss Saunders, company secretary and legal adviser at Oxfam. He cites the example of Café Direct, a company owned by Oxfam with three other organisations to promote fair trade. The Fair Trade Foundation, which offers the fair trade accreditation for food, was established by a number of charities, including Oxfam. It is an example of cooperation not only between charities, but commercial organisations as well.

It is worth noting that merging is really relevant only to service-providing charities rather than grant-making charities like the Wellcome Trust and Sainsbury Family Charities.

This distinction is made by Judith Portrait of Portrait Solicitors (in association with Denton Wilde Sapte), who also says that grant-making charities do “not want to see service-providers competing for funds. From the grant-maker's side, there may be a benefit of merging where charities are in competition”.

Although the level of interest and activity appears to be growing, the figures do not yet support the excitement. Particularly for big charities, merging offers little or no benefit. Mergers, it would appear, have not yet proved quite the snowball for charities that they have the potential to become, although according to some practitioners, the snow is still falling.

the lawyer 25 may 2000

Case study – The Terence Higgins Trust

The Terence Higgins Trust, founded in the mid-1980s, offers a classic example of a charity that has benefited from merger.

In the past few years, while the incidence of new HIV cases in the UKremains the same, the development of new drugs has meant that the mortality rate from full-blown Aids has fallen sharply from around 1,500 a year to a matter of hundreds. As the need for long-term care and treatment has increased, HIVcharities across the country have been forced to consider merging to maintain services, to institute national levels of care and to ensure 'brand' awareness in an increasingly competitive funding market.

In 1998, no less than six charities approached the Terence Higgins Trust with a view to merging. On 1 April last year, the organisation that has a total income of £6m merged with four regional HIV charities in Brighton, Coventry, Leeds and Oxford. Since then, it has absorbed two further regional service providers in Bristol and Bath.

Michael Carter, spokesman for the Terence Higgins Trust, says: 'Unlike a commercial merger the focus is on service provision rather than profit margins. As the nature of our clients' needs changed so did the structure of the organisation. What we're now able to offer are uniform standards of care across the UK. We offer services to 70 per cent of people affected by HIV, which puts us in a very strong position when seeking funding.

'The Terence Higgins Trust has reaped benefits from merging, not least by being able to increase the services on offer at a time when other service providers are failing to do so.'