• Nonprofit Merger Myths

Today merger is such a part of the nonprofit landscape that it’s strange to think that a mere 15 years ago it was rarely even spoken of. Over the years, La Piana Consulting has helped develop a growing body of knowledge and practice in this area, and if one thing is true it is that the more we do the more we learn. Because is still a young field, subject to misconceptions and misunderstandings, we think it’s helpful to address a few common myths about nonprofit mergers.

Myth #1: These are the best strategies for tough economic times.
Nonprofits typically cite competition for funding and other financial pressures as two of the top factors motivating them to consider merger. However, a merger itself does not generate revenue or reduce expenses. In fact, mergers usually entail short-term costs associated with planning, decision-making, and implementation. Even after a merger is approved, integrating staffing and systems may require continued investments for up to a year or more. And for nonprofits (unlike corporate mergers), the bottom line is first and foremost about mission, so once any “savings” are realized, they are often plowed back into higher-impact programs and services. If anything, making the choice to merge is a big investment decision. In the end, mergers tend to make strong nonprofits stronger; a merger cannot change the market dynamics an organization faces or move a marginal operation into the black if demand is insufficient or the underlying economics just don’t pencil out.

Myth #2: It is just like M&A work in the corporate world.
Nonprofit mergers bear little resemblance to those in the for-profit world. Nonprofits are not “acquired” (i.e. purchased); they merge for strategic reasons. Although it can be tempting for a large nonprofit to consider merger with a smaller organization a simple acquisition, wise leaders recognize that they are creating something that is not additive, but transformative. Both parties bring something to the table, and both partners will emerge from the process changed. This is also why nonprofit mergers are never “one size fits all” and should not be approached as a simple transaction. Nonprofit merger is more than a business decision; there are organizational values and cultures that need to be aligned in order for the merger to succeed. And what is success, when there are no corporate “stakeholders” receiving financial benefit as a result of the merger? Success is the community benefit when the new organization is more effective in advancing its mission.

Myth #3: It’s all about mergers.
While mergers are getting a lot of attention right now, they are only one of a number of options available to nonprofits looking for ways to achieve greater efficiency and improve outcomes. As more organizations choose strategic restructuring to further their missions, this entails more than mergers. Recently, we have helped a growing number of clients to create formal affiliations or joint programming agreements to expand existing programs (such as AARP Experience Corps) or to create new ones (like BELL and Y-USA’s Power Scholars Academy). Often, these partnerships are also supported by business plans to guide the new venture, and they can sometimes (in their own way) be even more challenging than a merger. Administrative consolidation, or shared back office services, is another choice — one that offers some of the efficiencies of a merger without requiring the same high level of integration. Additionally, networks and other more flexible forms of alliance are creating new ways to collaborate, particularly across fields and sectors.

Merger can be a powerful choice for nonprofits, but like any strategy, it has its utility as well as its limitations. We must be rigorous in testing our assumptions and expectations about what merger is, what it isn’t, and how it — and other collaborative strategies — can lead to greater social impact.


Tags: mergers, strategic restructuring

Comments

Leslie Forsyth
Friday, September 19, 2014 12:51 PM
I'm sure that I have seen UK research that suggests that mergers rarely deliver the expected benefits. That events described as mergers are often really takeovers, especially if there is a significant size differential. That in the aftermath of the merger it is rare for both parties to be satisfied. Usually it's just one.
Jo DeBolt
Friday, September 19, 2014 6:35 PM
Thanks for raising this important point, Leslie. There have been very few studies of nonprofit mergers -- and you're right that many studies of for-profit mergers report on acquisitions that are described as falling short of the goals established for the merger. In many ways, it points to the fundamental differences between nonprofits and for-profits.

First, the goal in for-profit mergers is to increase shareholder or owner value through greater profitability. Accomplishing this often means reducing costs by slashing operations and cutting staff. Morale dips, and little attention is paid to cultural integration or whether the business is working well. As a result, the financial goals are more difficult to meet and the acquisition is seen as falling short.

The ultimate goal in the nonprofit sector is social impact, but determining whether a merger is delivering more social good is challenging -- one reason why there are few studies of the impact of nonprofit mergers. Because the goals are different, the forms of restructuring are more diverse. There is the occasional "takeover"-like acquisition, but there are many more mergers that are designed as a combination of equals. Even when one organization has a larger annual budget, the other may have innovative programs, access to funding sources, or staff with specialized skills that the other doesn't possess. For nonprofits, the measure isn't purely financial. Nonprofits also pay more attention to cultural integration and intentionally managing change, which avoids some of the negative results of for-profit mergers and acquisitions.

We often hear that nonprofits should behave in a more businesslike manner. Mergers are an area where for-profits could learn some valuable lessons from nonprofits.
Pam Truitt
Monday, October 6, 2014 6:10 PM
Jo--many thanks for the clarity on what I would call strategies for effectiveness and efficiencies. While mergers have their place, as you have cited, there are other forms of collaboration that can help nonprofits be better at what they do--serve clients. Keep up the good work!
Jo DeBolt
Tuesday, October 7, 2014 11:07 AM
Hi Pam. You're so right, and The Patterson Foundation has been leading the way! http://www.thepattersonfoundation.org/work/collaborative-partnering.html
Joann Ricci
Thursday, November 30, 2017 5:09 PM
Jo, thanks for this thoughtful and insightful post. I believe many funders and donors think that the way to a more sustainable sector lies in mergers, only--and certainly that is one option to strategic restructuring.

Affiliations, strategic partnerships and other ways to join forces might be a more palpable and sustainable strategy in the long run, allowing nonprofits to grow in a planned way and to offer expanded programs to the community. I love the planned approach to combining forces and looking forward to getting updates on how they fare!



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