There is a strong history and growing trend of collaborative working within the arts sector, ranging from sharing resources and project working to formal mergers. So, what are mergers in business? It’s when two organisations combine into one entity to strengthen their ability to achieve their strategic goals. This article looks at mergers, particularly focusing on the why and the how.
When organisations develop strategic plans, collaborative working and mergers are legitimate strategic options because they improve strategic capability. Strategic capability means the ability of your organisation to pursue its chosen strategy successfully. Additional pressures such as the economic climate, anticipated spending reviews and government views will probably mean that mergers become more of an option. For example, former Minister of Culture Ed Vaizey stated that he wondered if there might be scope to strengthen the sector through more co-ordination or possibly mergers. It is also interesting to note that mergers appeared as one of the agenda items at the first Culture Forum meeting on 27 July 2010.
Mergers in Business: Benefits and Strategic Reasons
Understanding mergers in business includes recognising that they can produce a number of benefits for organisations and their beneficiaries, although they also create challenges. Some commonly quoted benefits include:
- more effective management, because leadership and decision-making become clearer;
- risk reduction, because organisations share responsibility;
- economies of scale, meaning cost savings from operating as a larger entity;
- improved service delivery;
- increased organisational profile;
- additional income sources; and
- increased capacity.
Key Stages for Mergers in Business
The main stages for mergers in business include:
- the initial consideration of the merger;
- a due diligence exercise; and
- managing the merger, which people often refer to as change management.
The initial consideration stage includes preparing the business case for the merger and deciding whether it represents the right strategic option. Other important issues include compatibility of organisational vision, values, and mission; risks and impact; compatibility of governing documents; choice of legal structure and new name; selection of trustees, management, and staff; compatibility of IT systems; required resources; and required consent if you run a membership organisation.
Due Diligence and Risk
Mergers in business can expose your organisation to risks and additional liabilities, and an effective due diligence exercise helps identify these risks before any formal agreement. Due diligence means carrying out a detailed investigation of another organisation before completing the merger. Because this process involves sensitive information, organisations normally use formal confidentiality agreements, especially if the merger does not proceed.
A due diligence exercise should begin as soon as you agree on the merger. The areas covered include financial, legal and organisational matters.
Financial due diligence
Financial due diligence examines financial health, reporting systems, funding stability, liabilities, pension schemes, insurance cover, and accounting policies.
Legal due diligence
Legal due diligence examines powers within governing documents, the legal form of the new organisation, TUPE (Transfer of Undertakings Protection of Employment, which protects employees when organisations transfer), existing contracts, and trustee appointments.
Organisational due diligence
Organisational due diligence examines the rationale for the merger, positional analysis such as SWOT (strengths, weaknesses, opportunities, and threats), compatibility of IT systems, and organisational culture.
Managing Change in Mergers
When mergers in business happen, strategic change often creates anxiety and concern among stakeholders, including employees, management, clients, funders, and trustees. Individuals influence strategy through their behaviour and competence, and many problems arise when organisations fail to understand and address behavioural change.
Therefore, effective communication and stakeholder involvement are critical from the start. Transparency, openness, trust, and integrity should sit at the heart of the merger process. Directors, trustees, and senior management must agree that the merger represents the best strategic choice.
However, stakeholders often worry about loss of autonomy, identity, job security and status. Open and honest discussions at an early stage help clarify misunderstandings, maintain motivation, minimise anxiety, and contribute to creating an organisation that is fit for purpose.
If the merger proceeds, organisations usually appoint the Chief Executive early because this decision provides leadership and clarity. This recruitment process should remain open, transparent and fair.
Organisations must also decide whether to involve external advisors. Arts organisations often have internal expertise to prepare the business case and evaluate due diligence. However, external advisors can help with change management, risk and financial analysis.
What Are Mergers in Business: A Strategic Option for the Future
Mergers will become more prominent as a strategic option. When you prepare a strong business case and manage the process correctly, mergers improve organisational capability and strength. Understanding mergers in business helps you decide whether this strategic option can support your organisation’s long-term future.