For it to work, there needs to more than an economic reason (more funding) or a consultant who signs a report.

The catalyst should come from the understanding that through the merger and the combining of staff that program impact and depth will go forward.

R

Which of course cuts both ways: I’m not per se opposed to funders deciding to try to encourage (or even do more than encourage) a specific merger. If analysis of that specific situation reveals that the funder’s mission goals would be better advanced by two or more nonprofits being merged into one then so be it, in that case we are if anything obligated to be not shy.

My concern is that (a) the key word often left out of discussion of this issue is “specific”; (b) the broad-scale facts of the nonprofit sector do not support a general conclusion that the sector would be better off with fewer separate organizations; and (c) reducing the number of separate organizations inherently harms, in the real world, certain values which are hugely beneficial to any sector and which have particular resonance for both donors and practitioners in the nonprofit sector.

My take on the whole debate is that mergers should be driven my mission. If a merger can enhance two organizations’ ability to execute their mission, than it might be a great idea. But it is important to remember that mergers are really hard to pull off.

In a word, Eric and Paul, there are no easy answers.

That interest in more mergers has risen among funders, both institutional ones and individuals, seems very clear — I’d be amazed if Arabella wasn’t hearing that from clients regularly. It’s the logical and factual basis for that interest which I’m questioning: I fear that lots of people whose greatest desire is the health and success of the non-profit field are at risk of inadvertantly doing that sector great lasting harm. At a minimum it would be helpful if briefings on the subject at least acknowledged the idea that mergers are not free of strategic cost for the sector.

And whether merging of nonprofits is actually increasing now is a different question. I’ve not yet seen any meaningful evidence one way or the other but would be very interested in it.

It certainly wasn’t my intention to advocate for a wave or burst of mergers. Quite the contrary, Our Issue Brief should help donors identify when and if a merger is appropriate and understand the concerns that donors and non profits alike should consider before heading in that direction.

In the end mergers are happening and they are likely to increase. Regrettably, it isn’t just a decrease in charitable giving but a significant decline in local, state and federal funding that is exacerbating the situation for many of the countries most worthy and most underfunded non-profits. As a result, if only anecdotally, we are seeing the growing interest in mergers among our clients and the organizations they support.

I hope Arabella Advisors’ Issue Brief can help guide philanthropists through the tricky waters of successfully supporting mergers and alliances when they are called for.

I really appreciate your thoughtful response.

But the argument that this particular sector needs a broad wave or burst of mergers, which I’ve heard consistently since joining the foundation sector in 2005 and which this post seems to be echoing without quite saying so, continues to baffle me.

“In just 10 years, between 1996 and 2006, the number of U.S. nonprofits grew by more than 36%, from one million to nearly 1.5 million. Over roughly the same period, the sector nearly doubled its revenues.”

So the number of nonprofit enterprises didn’t rise at anywhere near the same rate as the sector’s revenues. Or put another way, by 2006 there was far more revenue per enterprise than in 1996. What makes that a situation crying out for a _reduction_ in the number of individual enterprises?

“Then came the economic downturn…Giving USA’s latest numbers show total giving falling by 5.7% between 2007 and 2008, on an inflation-adjusted basis.”

Hang on — for the growth period we were talking about total revenues, now we’re just cherrypicking the charitable-giving portion. Seems like apples to kumquats, since charitable giving is far from all of the revenues that tax-exempt organizations rely on.

“So we now have a large number of nonprofits in the field and a shrinking pool of resources.”

Perhaps so, though we don’t know any such thing yet at a broad scale. Assuming that _all_ revenues to nonprofits have recently dropped at the same rate as has the charitable-giving portion, and assuming that the economy stays in severe recession for a full decade, and assuming that today’s nonprofits aren’t smart enough or focused enough to find any new sources of revenue….it would _still_, even with all of those assumptions, take more than a decade for the amount of revenue per nonprofit to drop to 1996 levels. Again: how is that a situation which cries out for reducing the number of nonprofits?

Meanwhile the idea that “we’re also seeing an increase in demand for many nonprofits’ services” (which has also never stopped being claimed regardless of general economic conditions) does now seem clearly true about some types of nonprofits, but just as obviously false about others. Has the downturn created a pile of new demand for the services of arts organizations? Land trusts? Think-tanks? Shouldn’t the argument for mergers deal with the reality of this being such a highly diverse sector now?

Meanwhile that last fact is a fine thing, which leads to the other issue that bothers me about the argument for reducing the number of separate organizations via mergers and acquisitions: the cost of doing so. Dynamism is a very real and important thing. This sector has a lot more of that today than when I first joined it 20 years ago, and that’s a very good thing. Not to mention diversity for its own sake, and some other values too — when a Wal-mart opens near a small town do we say “oh good, how efficient, there needed to be fewer small businesses around here”?

Now could funders successfully encourage a wave of mergers that are all so thoughtful and smart as to avoid lowering the sector’s overall dynamism, creativity and diversity? In theory, on a whiteout board in a conference room, sure we could; in real life application across a messy energetic mobile society, I’m not nearly so sure. At a minimum it seems like the argument for M&As, even if it can be made more convincingly on the facts, ought to acknowledge and balance those very real costs.

One of the fascinating things to consider is the incentives (or lack of incentives) for non-profit mergers. Whereas the self-interest of shareholders encourages mergers between for-profit companies, this cannot be said of non-profits.

An insight of our research is that mergers between non-profits tend to be driven by crisis (in funding or in leadership) rather than an explicit desire to improve.

Finding an incentive for mergers that increase the effectiveness of non-profits is the $64,000 question. Our report calls for a duty on boards to regularly consider whether a merger would be a better way serving beneficiaries, and more information to assist decision-making.