David La Piana // May 16, 2013 08:53
Marywood, Inc. was in its tenth decade of providing Austin, Texas with adoption and foster care services when it realized it was in a financial crisis. The economics of its field had changed: the number of newborns in need of adoption had decreased, and while this was a very good thing, as a result the organization was bleeding cash. Senior management had departed and the board of directors decided to take action. Marywood began merger conversations with Catholic Charities of Central Texas (CCCTX), a larger and more stable organization with a complementary mission and shared faith-based values. Chris Earthman, Executive Director of the Aragona Family Foundation, chaired the CCCTX board and was intimately involved with the conversations and resulting partnership.
“It really came down to an acquisition of Marywood by Catholic Charities,” Chris recounts. “Our thesis was that aligning Marywood with CCCTX’s brand and network of parishes would provide the marketing reach to serve more birthmothers and adoptive families. If scaled properly, this ministry had the potential to provide a net revenue contribution to the combined agency.” That is, it could be turned from a drain to a financial benefit.
After extensive due diligence spanning many months, the parties agreed that Marywood was in an existential crisis mostly due to market dynamics: a high level of competition for a shrinking “supply” of adoptable babies, a low fee structure, declining scale, and unsuccessful marketing and outreach. CCCTX decided to take a risk, not on merger, but on a service agreement to essentially run Marywood for 18-24 months, and to absorb any resulting losses during this turnaround effort. The result, according to Chris Earthman, was “some uptick, but primarily still a net drain on the organization.” After 18 months of single-digit adoption placements, CCCTX fully exited the business, shuttering the 90+ year-old institution in early 2013.
Chris recounts several lessons learned from this experience:
• Ask why you are looking at merging. Is the transaction aligned with what the market is telling you, or going against it? Changing the name on the door doesn’t change the underlying market dynamics.
• Staff changes have outsized impact in smaller organizations. Mergers are often a catalyst for staff changes (both employer-instigated and employee-instigated).
• Ring-fencing the agreement with distinct boundaries (18 months) and assessing risk tolerance up front (i.e. setting a threshold for acceptable losses) made this an “experiment” that didn’t sink the acquiring organization.
Though painful, the experience did ultimately yield a positive outcome for CCCTX. As Chris tells it, “We took the Marywood experience and applied it to the acquisition of ICOS (Immigration Counseling and Outreach Services) in 2012, which has been a huge boon to CCCTX’s immigration legal services program. As a result of this acquisition, CCCTX more than doubled the volume of clients served and achieved a 300% increase in earned revenue over 12 months. This transaction would not have gone as smoothly (or happened at all) if we didn’t have the “battle scars” from the Marywood experience. The failed Marywood acquisition helped us better understand our risk tolerance.”
This case offers a reminder that merger is not designed to change the underlying market dynamics an organization faces. A good merger can strengthen management, improve strategic positioning, and bring needed scale, but it cannot move a marginal or declining operation into the black if demand is just insufficient or the economics of the activity don’t pencil out. CCCTX’s approach — a good faith effort within specific time and financial constraints — represents a commendable and smart approach to trying, but knowing when to make the tough decisions.