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It could all have been very different for London and Quadrant Housing Trust. Several years ago, the 拢121m-turnover RSL was poised to merge with another association when a gaping 拢1m black hole was found in the pension fund of its would-be partner. The deal was dropped immediately, but the fright of coming so close to catastrophe taught it the importance of due diligence.

With more and more housing associations looking out for merger opportunities and sizing up their peers as potential partners, it鈥檚 easy to imagine L&Q鈥檚 brush with near disaster befalling any one of them. But L&Q鈥檚 directors weren鈥檛 about to put the association and its 39,000 units in harm鈥檚 way again, so they assembled a crack team of accountants whose job it is to swoop into would-be partners and conduct a thorough check on their financial health before any merger plan is taken further. In the past year, the team has given the green light to two deals with associations 鈥� Nucleus Housing Group, completed in October, and Beaver Housing Society, still under way 鈥� and blocked three.

鈥淎 merger is huge time commitment. It takes about a year from start to finish,鈥� says David Montague, L&Q鈥檚 group finance director and head of the merger team. 鈥淚t makes sense, rather than waste a year of two organisations鈥� time, to go in, do some early due diligence and decide quickly.

鈥淲e鈥檇 wanted for some time to extend our geographical focus into the north-west of London and the uppermost part of the South-east region. A couple of years ago, several associations came on the market and we saw the sense in putting together a dedicated team to deal with those opportunities.鈥�

If you've got a reluctant party coming to the table to negotiate a merger, it can become quite adversarial. Getting our own people involved at an early stage avoids this

David Montague, group finance director and head of the merger team

In-house expertise

Montague turned not to a consultant or an external auditor but to the in-house staff who are responsible for keeping L&Q itself afloat 鈥� the financial department. He leads the resulting team, alongside director of finance, treasury and investment Waqar Ahmed and director of financial services Sarah Smith. They manage four merger-team staff specialising in payroll, insurance and accounts. Most are qualified accountants, some having trained while working for L&Q. Montague says he chose people who could 鈥渉it the ground running and look at areas like insurance at another association and really understand what they do鈥�.

Being on the team is 鈥渜uite a big responsibility鈥�, confides finance manager Craig Stevens. 鈥淲hen we were at Slough [the Nucleus HQ] we worked to a tight timescale while making sure everything we did was accurate, but we still had to worry about our jobs here. I had to keep phoning the office to check things were under control.鈥� He says the best thing about the job is 鈥渂eing able to see how other people work. Associations all need to provide places where people want to live, but when you get inside another association you see that people work differently. You might find they do something that could make our lives easier here.鈥� An example is L&Q鈥檚 adoption of Beaver鈥檚 accounting system, which it discovered through the due-diligence process.

I enjoy the getting to know people part. It makes a huge difference to the people you鈥檙e merging with to meet the real people at L&Q rather than external auditors

Alison Haines, financial processing manager

Once L&Q decides to bid for an association, the team gets to work. The first step is to meet their opposite numbers and the board at the potential merger partner. This can sometimes be a tense encounter.

鈥淣ucleus was very much in control of its own destiny; this was something they鈥檇 chosen,鈥� says Montague. 鈥淲ith associations under supervision it鈥檚 been difficult, or at least different. For one thing, you鈥檝e usually got Housing Corporation appointments on the board. They are only there to see this process through, so the meeting tends to be more focused on the short term.鈥�

Ahmed says the point of the meeting is to help the team get a handle on the board鈥檚 strategy for the future. 鈥淭he first thing we do is to try to understand its business plan by talking to key officers, looking at their assumptions. That gives us a very good understanding of their operation but we also develop relationships with them as people.鈥�

You feel a bit apprehensive going into someone else鈥檚 office to go through their books. You don鈥檛 know what they have been told

Keith Petty, insurance officer

While Ahmed unravels the business plan, Smith and the rest of the team get stuck into the books. 鈥淲e look at the year-one starting position, taking the association鈥檚 own figures and trying to match them back to supporting documentation,鈥� Smith explains. 鈥淲e look at historical performance and the assumptions they are making, and consider how costs will increase. Are they making realistic changes, given what we know about the business, economy and what鈥檚 going on in the sector? For example, we look at things like maintenance and repairs 鈥� is this being fully supported so major repairs are resulting in less day-to-day work being needed?鈥�

Getting this information is a delicate business. It means going into the would-be partner鈥檚 office, sitting down with financial staff and requesting document after document. While weighing up the merger, the L&Q team stayed in a hotel and turned up in the Nucleus office daily for two weeks.

Tact is vital, admits financial processing manager Alison Haines. 鈥淚 realised with Nucleus that you have to be aware of where you are and who you are talking to. You have to get people to trust you and understand that the reason you鈥檙e there is because this is a good thing. It can be difficult, as some associations have gone through so much.鈥� Her technique is 鈥渢o talk to people, try to reassure them and make lots of eye contact鈥�.

For our merger with Nucleus, the preparatory work was done, so once the deal went through it was as if we had already been working with them for a year. If external people had worked on the merger, we would have had to start learning now

Waqar Ahmed, director of finance, treasury and investment

Mutual benefits

The team also considers how L&Q and its potential quarry might benefit each other, and it鈥檚 here they confront the thorny issue of cost cutting. Traditionally, mergers lead to cuts in central administration, procurement and development, but Ahmed stresses L&Q鈥檚 policy is to avoid making redundancies.

鈥淚n the last two mergers we have given 鈥榥o redundancy鈥� guarantees. Because we are a large organisation with a large turnover, if there are economies to be made they can be made in the long term without redundancies. An organisation isn鈥檛 going to want to work with us if we鈥檙e going to lay off staff. We want the association to feel they鈥檒l benefit from merging with us,鈥� he says. L&Q will sack external consultants, however. 鈥淲e鈥檝e got all the skills in-house, so we can use one internal set for everyone.鈥�

So far, Montague is convinced that using the merger team is the right way to vet potential deals. 鈥淚t makes so much sense to make sure the fit is there, that you share values, that you approach business planning in the same way and that the chemistry is right. We can do all this within a very short period,鈥� he enthuses.

The real test, however, will be the outcome of L&Q鈥檚 deals with Nucleus and Beaver. The question remains whether the merger team, which only forms when the need arises, can be as good as full-time professional auditors.

Haines says emphatically that L&Q鈥檚 finance department is best placed to understand its counterpart at another association. 鈥淚鈥檓 not saying external auditors don鈥檛 have a role to play 鈥� they clearly do 鈥� but we are a successful financial department. We do our own jobs every day and we take that knowledge with us.鈥�