By Amber Kubecka and Ron Thomsen

Ron Thomsen and Amber Smyth – joint venture parties in One Direct Advisory and PBL Law

This is the second of a three-part series examining the approach and considerations for effective M&A, joint venture parties in One Direct Advisory and PBL Law, authors Ron Thomsen and Amber Smyth outline the various steps and processes, especially for regional and NFP entities.

This paper focuses on what may be required to be considered in a small to medium merger or acquisition. The commitment to a merger or acquisition is understandably a major decision that could take executive and board resources at least 9 months of change management and due diligence work.

Every merger and acquisition is different, however, there are some common considerations that all entities embarking on such a venture must address, especially for smaller to medium organisations.

In our last Mergers and Acquisition paper, we commented on the importance of culture and community.

The steps to implement a merger, assuming the target party has already been selected, and preliminary research has been completed may be outlined as follows, some of which may be undertaken concurrently:

Step 1

• Determine if you need a merger advisor or facilitator and whether and when you may need legal and financial advice.
• Determine aspects of the work you will do yourself, and work which will be outsourced to professionals.
• Understand the cost commitment of the complete merger exercise, which may involve seeking tenders for some work.
• Consider the contents of the Constitutions of each respective organisation and membership benefits.
• Possible corporate structures for best outcomes.

Step 2

• Determine the merger contractual arrangements, including a non-binding Memorandum of Understanding (MOU), covering confidentiality, processes and costs sharing etc.
• Form a working group with representatives from both parties with delegated board authority to progress the merger.
• Agree on the common objectives and outcomes of the merger, including time frames. This activity could also determine a work plan for the working group and an implementation timeline.
• Determine stakeholder benefits and a communication plan for informing all parties.

Step 3

• Some larger mergers could result in a prerequisite business plan, including a competitor SWOT and risk analysis.

Step 4

• Determine the ongoing board and CEO, if from the existing people or consider recruiting externally. It is likely that there will be pressure to announce this decision, as existing resources want to know whether they will be part of the ongoing team or not.

Step 5

• Undertake the necessary financial, legal and HR due diligence. This activity will be the subject of our third paper due to be published in early May.

During these above steps, it is likely there will be problems that arise, which will require rectification. Whilst it is important to have an overarching plan, it is equally important to have the flexibility to allow for unforeseen events. These will most likely arise during due diligence exercises.

Other key considerations which will be vital for a successful merger, include:

Common Objectives

Although it may be obvious, it is important to confirm that both parties have common objectives about what is to be achieved by the amalgamation.

Such objectives may have varying degrees of importance, depending on what has prompted the merger.

For example, if the motivation for the merger was financial, a defined objective may be to increase the return on revenue. By comparison, if the objective was in relation to meeting accreditation, then the objective would be to pass external reviews.

Working group representatives

Having a defined working group with representatives from each merger party, who has board delegated authority, will not only speed up the merger process and obviate requiring both boards to approve every action or decision but it will also share the workload.

One important facet of the working group is that it starts building a new team culture with a common purpose. This was discussed in our first article.

Communication Plan and HR Considerations

Embarking on a merger process will create uncertainty amongst all stakeholders, but especially staff, who can often feel anxious and negative about the process.

In the interests of staff retention, it is important to provide regular informative updates to staff about what is happening and what is expected next.

It is important that commitments or promises are not made, as it is not possible to determine what the due diligence will uncover and what impacts this will have on the merger plans.

A good understanding of employment awards, particularly if the merged entity has more than one applicable award, is essential. An HR workplace expert could assist in this area.

The merger process journey is not rocket science. Provided there is a good merger and working group plan established from the outset, with a competent team to address the implementation, it is very manageable.

Mergers that do not result in the desired outcome generally fall over because the common objectives, merger plan, and implementation are not cohesive, or the respective parties fail to work together.

By Amber Kubecka and Ron Thomsen

Ron Thomsen and Amber Smyth – joint venture parties in One Direct Advisory and PBL Law

In the first of a three-part series examining the approach and considerations for effective M&A, joint venture parties in One Direct Advisory and PBL Law, authors Ron Thomsen and Amber Smyth outline the importance of assessing cultural compatibility and community benefits, especially for regional and NFP entities.

For aged and community care centres and not for profit charities, the positive culture created by the people within is often critical to their financial success. This organisational kinship is particularly pertinent in regional-based entities which have close and committed communities.

Due to recent events, including the COVID-19 pandemic, natural disasters and changing social and political situations, it appears that no business has been immune to the new challenges and risks that this changing environment presents.

In challenging times, strong relationships amongst personnel within organisations can assist with facing and dealing with adversity, due to their teamwork and resiliency skills. However, of equal importance is to have a business plan and risk mitigation strategies ready to act upon the occurrence of particular events.

In his column on 8 April 2021, the Australian Charities and Not-for-profits Commission (ACNC) Commissioner, The Hon. Dr Gary Johns said that some charities may:

‘find that the short-term strategies they have had in place to date are not viable in the longer term, requiring them to consider making significant changes.’

The Commissioner went on to say that those charities may consider shared service arrangements with other charities to reduce back-office overheads or merging with another suitable charity which can reduce financial uncertainty, and could lead to successes down the line, with expanded services and economies of scale.

Mergers are often implemented to assist businesses struggling due to recent events, get them back into recovery mode but should not be seen as a failure on the organisation’s part.

The importance of aligning two organisations’ values is often undermined given the survival instinct that arises which forces the focus onto finances. If organisations have common objectives, similar values and the same understanding of how to treat stakeholders and clients, then mergers can be much more successful. Establishing these elements upfront, prior to deciding to engage in a merger can be the difference between a merger’s success and failure.

THE PARAMOUNT CONSIDERATION FOR A MERGER OR ACQUISITION WILL BE THE BENEFIT TO THE CHARITY’S STAKEHOLDERS, AND PRINCIPALLY WHAT WILL THE CHARITY’S CLIENTS ENJOY?

A merger or an acquisition could be investigated for either offensive and expansive reasons or defensive considerations to shore up future viability.

There are a number of reasons why a charity might consider a merger or acquisition besides financial considerations. These thoughts, which may individually prompt the decision, but more than likely, multiple considerations together would result in the decision to engage in a merger or acquisition, include:

1. Financial stress in the residential aged care sector, especially in regional areas.
2. Lack of Government funding support. Even following the Royal Commission recommendations for funding support, remedies to existing circumstances can be long coming.
3. Loss of key executive and board members which have been integral to the charity’s operation.
4. Inability to maintain service standards and compliance which could be due to financial reasons, lack of staff or suitably trained clinical people.
5. Just ‘treading water’ despite very hard work, especially over recent years and only surviving without moving the business forward with purpose.
6. Business expansion in terms of geography, client numbers and products and services can be a defensive strategy.
7. Diversifying income streams and ‘not having all your eggs in one basket’.
8. Addressing underperforming assets through a merger.

Culture in a merger can be as simple as joining a like organisation in a neighbouring town, but is there a shared vision of where you want to be?  You don’t want to invest executive and board time into achieving a merger plan if you can’t work together going forward.

In regional Australia, mergers of aged care facilities can impact the local economy, if it creates replacement of jobs or regeneration of local opportunities. It is fair to say that regional aged care services need support, but removing them could cause damage to the local community.

In our next two articles, we will discuss in more detail, a list of implementation and due diligence considerations that need to be addressed prior to a merger or acquisition.