Tread Lightly in Nonprofit Mergers

Economic forecasters may differ about the projected length and severity of the recession, but it seems to be more significant than the nonprofit world has faced in a long time. Some of the estimates of what might happen are dire. Indeed, Paul Light, a scholar at New York University, has suggested that perhaps as many as 100,000 nonprofit organizations might not survive a serious downturn.

Such peril might bring about the first real wave of nonprofit mergers and acquisitions. The idea that mergers will soon become popular in the nonprofit world has long been predicted, but this time, circumstances might force it to happen.

What do nonprofit leaders need to know about nonprofit mergers and acquisitions? Much more than we do now.

Scholarship, books, and other guidance on mergers and acquisitions is much more robust in the business world, and nonprofit groups are often forced to turn to such sources because nothing else is available. What’s more, many charity board members come from corporate America and bring their ideas about for-profit mergers to nonprofit situations. But applying for-profit experiences to nonprofit mergers in a rigid manner might not be helpful.

Given the lack of detailed information available about mergers, I can offer my experience on what nonprofit groups need to understand. I worked at large companies for 11 years and had the opportunity to observe merger and acquisition activities in a corporate environment. I have also carried out a couple of mergers and affiliations during my leadership of the Families International group of charities and have witnessed successful and unsuccessful mergers, acquisitions, and affiliations among the 525 member organizations of the Alliance for Children and Families and United Neighborhood Centers of America, two groups that come under the Families International umbrella. Indeed, the Alliance for Children and Families is itself the product of a merger in 1998 between Family Service America and the National Association of Homes and Services for Children.

• Risks are the same in nonprofit mergers as in business — but the rewards are much smaller and less tangible. Executives who lead successful for-profit mergers or acquisitions are handsomely rewarded with compensation and stock benefits. Nonprofit executives who lead successful mergers or acquisitions are told “nice going.”

  Failure is unpleasant in either circumstance. But because the amount of risk is great compared to the potential rewards, neither board members nor nonprofit executives have much motivation to be aggressive in pursuing mergers and acquisitions. Why take material personal risk for little personal gain?

• Getting board support for a merger is critical, especially for carrying out the difficult work needed to unite two disparate organizations. Forget about any of those corporate examples of hard-driving CEO’s who make singular decisions and expect rubber-stamp support from the board.

  In most nonprofit institutions, chief executives and boards will collaborate on a potential merger and pursue it with far less secrecy than in the corporate world. Governance issues seem to have a higher emotional value in nonprofit mergers than in for-profit ones. Many nonprofit CEO’s are able to get board support before and during a merger, but the operational challenges of making a merger work often seem to distract the CEO from active, open communications with the board.

• Nonprofit mergers usually arise from a delicate and shifting blend of strategic and opportunistic components.

  Let’s remember that mergers are art, not science. Mergers need to be grounded in organizational strategy, but, without some appreciation for unanticipated opportunity, one might be left standing at the strategic starting gate for a very long time. Conversely, mergers or acquisitions that are too driven by spontaneity are fraught with both shortand long-term dangers. Weak nonprofit groups usually wait too long before they pursue mergers or affiliations and, thus, lose both strategic value and short-term opportunities.

• Nonprofit mergers take longer and cost more (adjusted for size) than anybody usually forecasts. Unlike in for-profit mergers, little urgency is usually involved in a nonprofit merger or acquisition. Unlike in for-profit mergers, most nonprofit groups do not have unlimited resources to “throw” at merger discussions or due diligence and thus cannot easily “make up” budget shortfalls with excess cash.
• Most nonprofit mergers will or should be driven by a desire to grow rather than to save money. Transaction costs for mergers among nonprofit organizations tend to be high (adjusted for size), and most nonprofit groups are too small to realize the kinds of cost savings that often make for-profit mergers attractive.
• Putting the merger in place is harder than negotiating a deal. Negotiating a merger deal can be exciting; and nonprofit leaders can easily get so caught up by the possibilities that they lose sight of the operational challenges ahead. Making all facets — operational, governance, cultural — of a nonprofit merger work is very tough and, too often, underestimated. It is important for nonprofit leaders to formulate a good plan for how the merger will become a reality and to aggressively monitor the process of uniting two organizations, adjust plans as difficulties emerge, and communicate thoughtfully about potential trouble spots.
• Mergers are very different than acquisitions. Nonprofit leaders are not comfortable with the term “acquisition.” Perhaps that is because we do not know how to value or set a price for a nonprofit acquisition. Regardless, this inability to call an acquisition an acquisition leads to false and unreasonable expectations about governance, decision making, and sometimes identity and culture in the period after an acquisition has been approved and is being put into place. It never ceases to amaze me when the chief executive of a relatively large organization confides in me about secret “merger” talks he or she is having with an organization one-tenth the size. This mislabeling or misperception can create false or misleading expectations for the organization that is being taken over and bedevil the post-acquisition process. Fuzzying up the difference between a merger and an acquisition in the negotiation process just to get the deal done often leads to difficulties running the combined organization after the acquisition.
• Mergers and acquisitions often benefit from more complicated organizational structures than most nonprofits have. Complex organizational structures allow groups to consider different types of alliances — and pursue ideas that might work far better than is possible under the simple structures of most nonprofit groups. Holding-company structures, while complex, offer more flexibility for mergers, acquisitions, and affiliations.

Nonprofit mergers or acquisitions require charities to spend significant sums and take on many risks. Often those costs are considered too risky to incur.

We need to get past this obstacle, however, if nonprofit organizations are to meet the demands placed upon them in this bad economy. Most logically, foundations and other big donors would step in to finance the merger process for charities, and help build understanding of how to make it work.

But foundations have talked about the value of mergers for a long time without making many grants to support them. Given the interests that government has in a strong and vital nonprofit world, perhaps the Obama administration might consider providing a pool of funds to enable the nonprofit world to do what it has so far not been able to do.

During an economic situation as tough as the one we are mired in, many nonprofit groups have been called on to increase their services, all while dealing with the same economic trouble as every other type of organization in the United States. Many of those organizations may have to merge or affiliate with another to meet the demands facing them now and in the future. By following a careful plan that avoids the obstacles involved in mergers, they could end up in a stronger position to fulfill their missions and help make their communities even stronger.

Peter Goldberg is chief executive of Families International and the Alliance for Children and Families.