Merge Ahead?
Thursday, July 16, 2009
By: Bruce Boyd

As charitable resources shrink along with the economy, nonprofits and their funders are looking for ways to maximize their impact and minimize their costs. Increasingly, they have identified nonprofit mergers and alliances ("M&A") as strategies for helping nonprofits survive -- and hopefully even thrive -- in this new economic reality.

A recent study by the Nonprofit Finance Fund found that 42 percent of surveyed organizations either had developed a program in partnership with another nonprofit in the past year or planned to do so in the coming year.  Nearly 20 percent expressed an interest in conducting a merger feasibility analysis, and five percent indicated that they had recently merged with another organization or intended to do so soon.

Meanwhile, foundations across the country have begun hosting workshops to help grantees explore opportunities to collaborate.  Some foundations, including the San Francisco Foundation and Dayton Foundation have set up funds to cover the up-front costs of M&A.  Through its Collaboration Prize, the Lodestar Foundation has collected M&A case studies that it will soon begin sharing through a searchable database.

Of course, no sensible soul thinks that M&A is a magic cure-all for economic woes.  Nearly everyone agrees that increased efficiency and effectiveness are good -- at least in theory -- but some commentators fear that a rush to merge could hurt the nonprofit sector.  With that in mind, let’s explore what philanthropists should know about the pros, and possible cons, of nonprofit mergers and alliances.

Done well, nonprofit mergers and alliances can help the organizations involved pursue their missions more effectively.  They can enhance impact, increase capacity, expand geographic reach and open doors to new funding opportunities -- for one or both organizations involved or, in the case of a merger, for a single organization that succeeds them.  They can also produce long-term cost savings through economies of scale and the consolidation of overlapping services.
 
In today’s economy, such savings could be crucial to both nonprofits and their funders.  In the wake of a 30 percent drop in foundation endowments, many philanthropists believe that the smaller pool of funding simply cannot sustain the 1.5 million nonprofits now operating in the United States.  They view mergers, back-office consolidations and shared programming as necessary means to leverage reduced resources and minimize the loss of needed services.

Still, successful M&A is more easily discussed than accomplished.  For instance, mergers (and other forms of meaningful collaboration) often depend on an organization’s leadership prioritizing the institution’s mission above the institution itself.  They may require personal selflessness, since, in the case of a merger, some staff, including executives, may lose their jobs.  There may also be cultural clashes between partners and enough upfront costs and third-party expenses -- from feasibility studies to new IT and back-office programs -- to undercut even well-laid M&A plans.  Successful M&A generally requires major upfront investments of money, time and patience.  The returns on those investments can be big, but they are mostly realized over the long term over the next few years, not the next few months.

Little wonder, then, that our research shows that nonprofit mergers and alliances are far more likely to succeed when forward-thinking organizations put mission first and think strategically about how they can most effectively work together to achieve shared goals.  When motivated merely by financial fears or forced at the hand of a donor, M&A efforts are far more likely to fall flat.

In the end, today’s financial challenges may provide an impetus for some nonprofits to have more open discussions -- both internally and with potential partners -- about their future direction.  An increase in available funding for restructuring may also lead organizations already considering a merger to go ahead and take the plunge. But nonprofits and their funders should remember that, in this sector, M&A isn’t just about the bottom line.  Rather, they should support mission-driven M&A efforts that seek to improve services as well as financials.
 
Philanthropists can help in a variety of ways.  They can bring together grantees with overlapping interests to discuss common problems and possible solutions.  They can sponsor educational activities that raise awareness about M&A.  And, of course, they can directly fund the aforementioned costs.  The point of such investments, however, shouldn’t just be to help nonprofits weather the current economic storm.  The larger goal is to build better services for the future.

About the Author

Bruce Boyd is Principal and Managing Director at Arabella Philanthropic Investment Advisors, a national philanthropy consulting firm that works with individual philanthropists, family foundations, institutional donors, and corporations to make their giving more effective. Mr. Boyd leads Arabella Advisors' Chicago office.