America’s 2008 financial crash hit nonprofits at least as hard as it hit businesses and homeowners.  Vital funds from individuals, corporations, and governments dried up very quickly, and in most cases have not fully recovered. 

The venerable Bridgespan Group used the crisis to help nonprofit leaders contemplate the potential benefits of mergers and acquisitions.  In an inaugural article on the subject in 2009, “Nonprofit Mergers & Acquisitions:  More than a Tool for Tough Times,” Bridgespan explored the many obstacles to nonprofit mergers, as well as the types of strategic benefits nonprofits might realize from merging.

In the for-profit sector, experts are routinely on the hunt for merger opportunities that will reward them with cash windfalls.  There is strong financial motivation for mergers and acquisitions (M&A), multi-faceted expertise in how to proceed, and a sector culture in which M&A activity is part of the landscape. 

None of these factors holds true for the nonprofit sector, where there is little expertise in M&A, uncertain financial benefit, and, most leaders feel, no time to learn.

However, nonprofits can realize several strategic benefits from mergers and acquisitions.  Among those considered by Bridgespan:

·         Improvements in the quality and/or efficiencies of existing services.
·         Ability to offer a wider range of mission-relevant services.
·         Expansion of geographic reach.
·         Acquisition of new staff capacities.
·         Access to new sources of funding.

Bridgespan offers case studies of two successful sets of nonprofit M&A activity – the Arizona Children’s Association, and the Hillside Family of Agencies in New York.  Both studies offer valuable early lessons in dealing with the daunting obstacles to M&A in the nonprofit sector.

Additional discussion of the topic, from around the same time, was hosted by the Chronicle of Philanthropy. This conversation includes Lois Savage, President of the Lodestar Foundation, which established the Collaboration Prize in 2008 both to encourage collaborations and to gather vital information about how collaborations are being pursued in the nonprofit sector.  Learn more here, and let me know what you think!

 
 
Five years after their first exploration of merger and acquisition (M&A) activity in the nonprofit sector, the Bridgespan Group found itself asking, “Why Nonprofit Mergers Continue to Lag.”  Not only has the needle on successful nonprofit mergers barely budged since 2008, the number of U.S. nonprofits has actually grown. 

Nonprofit mergers fail for several reasons:  because they are undertaken as a last resort, when one or both organizations is already in severe trouble; because leaders lack expertise in how to manage mergers; because few funds are available to support the real up-front costs of merging, including due diligence; because few matchmakers exist to help potentially compatible organizations find each other and begin conversations.

The Lodestar Foundation is one of the increasing number of funders actively supporting nonprofit M&A activity, with its Collaboration Prize and with “mixers” of funded organizations that might find common cause over cocktails.

The Foundation Center highlights other foundations committed to supporting nonprofit collaborations and mergers, and has created the invaluable Nonprofit Collaboration Database to inspire, inform, and suggest potential matches for nonprofits looking for the full range of collaborative opportunities, up to and including M&A.

Meantime, the Bridgespan Group continues to support M&A activity with advice on all aspects of the process.  Of particular interest is attention to the emotions involved in the prospect of merging.* 
Worries about the loss of identity, jobs, autonomy, service quality, funding, and established relationships are legitimate, pervasive, and often acted out as obstruction rather than openly aired and considered as part of the process of due diligence and planning.  Any M&A effort will be doomed if senior staff and board members are not actively involved in considering and planning it from the outset. 

And, of course, it’s always possible that M&A is a bridge too far.  David LaPiana and Associates provide a concise explanation of partnership possibilities short of merging that can have strategic value for the organization and are generally much easier to achieve.  You can view LaPiana’s “Partnership Matrix” here. 
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*The rare organization with an established culture of expressive change, or "inscaping," about which I've written earlier, will find the process much easier.
 
 
In a substantial step to close the information gap about successful nonprofit mergers, Minnesota’s MAP for Nonprofits conducted an in-depth study of 41 nonprofit mergers in that state between 1999 and 2010 and published its findings in “Success Factors in Nonprofit Mergers.” 

The researchers defined mergers as successful if the resulting organizations enjoyed the following outcomes:

·         Improved image, reputation, or public support.
·         Improved, expanded, or preserved services.
·         Increased quality of operations.
·         Increased efficiency of operations.
·         Improved financial stability.
·         Development of a positive organizational culture.

Major factors predicting a successful outcome included:

·         Positive relationship among the executives of the pre-merger organizations.
·         Executive leadership for the merger (95 percent of respondents said the merger would not have happened without the executive’s support; in 80 percent of organizations, the executive director had recently stepped down or was soon to retire).
·         Close pre-merger examination of financial and legal records.
·         Board support (not always easily achieved).
·         Involvement of non-administrative staff in planning.
·         Funder support.
·         Involvement of consultant(s).

Interestingly, MAP found that when at least one of the partner organizations was in considerable financial distress before the merger, staff members integrated more willingly, and the merged organization was more successful.

MAP and its partners have provided an excellent public service by conducting this study.  If you are considering a merger, I hope you’ll learn from Minnesota’s experience, and let me know what you think.

 
 
Three nonprofit CEOs walked into a bar, and only one walked out:  the one taking the helm when they finalized the merger of their organizations.

If this sounds like a nightmare to you, I understand.  I’ve been a nonprofit CEO, in no great hurry to give up my chair. 

Yet CEO leadership is a necessary condition in the vast majority of successful nonprofit mergers.  With the looming retirement of hundreds of thousands of baby-boomer CEOs, this might be exactly the right time to get the job done.

But why merge?  In the big picture, there are several reasons. 
  • Fragmentation of the sector.  Did you know there are more registered non-profits than lawyers  in the U.S.?  (~1.45m v. ~1.23m) Most nonprofits have annual expenditures of under $100,000, but all have at least a handful of board members and infrastructure expenses, often including (underpaid) staff. 
  • Unsustainability. Shrinking funding sources are spread too thin. The U.S. government reports that 38 percent of nonprofits ended 2012 with a deficit.  More than half of the nonprofits responding to a 2013 Urban Institute survey had cut or frozen staff salaries in response to funding cuts, and 42 percent covered deficits from reserves. Yet only 11 percent cut any programs.
  • Burnout.  Younger staff experience the resulting burnout firsthand, witness the toll it takes on leaders, then hesitate to step up to shoulder endemic problems in the sector.
We talk often about competitive threats, but why not turn “competitive threat” into “collaborative opportunity” – or even merger potential?

Outstanding resources are emerging to help nonprofit leaders assess the viability of mergers, and tackle the complex operational and emotional terrain involved.  I have recently written about a few of these resources.  I hope you will take a look at my blog posts on why to mergepitfalls to avoid, and characteristics of successful mergers, and let me know what you think.

Until next time, all good wishes,
Theresa