This is a guest post authored by Eric Kessler, founder of Arabella Philanthropic Investment Advisors.
By Eric Kessler
Nonprofit mergers and alliances (M&A) are a hot topic these days among philanthropists and nonprofits alike. Both the Association of Small Foundations and the Council on Foundations are hosting teleconferences on the subject later this month. And at Arabella Advisors, we’re releasing an issue brief this week, “Investing in Nonprofit M&A.” (You can download a copy here.)
What’s behind all this interest? And what should philanthropists know about how nonprofit mergers and alliances work (and don’t)? Let’s start with a look at some key statistics.
First, the nonprofit sector has recently undergone a period of remarkable growth. 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.
Then came the economic downturn. Foundations’ endowments fell, philanthropists’ portfolios shrank, and giving to nonprofits contracted: Giving USA’s latest numbers show total giving falling by 5.7% between 2007 and 2008, on an inflation-adjusted basis.
So we now have a large number of nonprofits in the field and a shrinking pool of resources. Meanwhile, we’re also seeing an increase in demand for many nonprofits’ services, as the population at large feels the effects of the downturn. In this context, any solution that holds the potential to cut costs without undercutting impact looks especially attractive, and M&A holds just that potential.
Done well, nonprofit mergers and alliances can be powerful tools for success, enabling merged or allied groups to realize economies of scale, expand their reach, tap into new funding options and achieve greater impact. But only if they’re done well, and doing them well isn’t easy.
Nonprofit M&A efforts often face significant barriers. With personal and institutional egos on the line, nonprofit leaders sometimes find it hard even to talk about mergers and alliances. And upfront costs and third-party expenses–from feasibility studies to new IT and back-office programs–sometimes undercut even the best-laid M&A plans.
Meanwhile, unrealistic expectations can cloud the entire process. Fears of M&A often stem from worst-case horror stories from the for-profit world, and hopes that M&A will produce significant short-term savings often have little grounding in reality. In fact, successful M&A usually requires significant upfront investments of time, money and patience. The returns on those investments can be huge, but they are mostly realized over the long term, not in the next few months.
It should come as no surprise, then, that M&A efforts that begin by focusing narrowly on the bottom line often go awry. 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.
Philanthropists can help them do that in a variety of ways. They can bring together grantees working in the same geographic or program areas to discuss shared objectives, common problems and strategies for addressing them. They can sponsor educational activities that raise awareness about M&A possibilities among grantees or that help to develop knowledge within the field. They can also directly fund the costs of M&A, from initial feasibility analyses to final assessments.
A handful of foundations have already established funds to help groups defray the costs of restructuring, including the San Francisco Foundation, Dayton Foundation and Toledo Community Foundation. Meanwhile, the Lodestar Foundation has identified a variety of model cases for mergers and alliances through its Collaboration Prize.
Used effectively, such funds and tools have the potential to improve the nonprofit sector for the future–even in the midst of the current downturn.
10 Comments
I’m an analyst at New Philanthropy Capital and the author of a recent report on mergers. See http://tiny.cc/npmerger
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.
Thanks John. Incentives (monetary and otherwise) are a critical variable for philanthropy to think more about. Mergers seem like the perfect example.
Well sure, who’s against mergers that bring lots of benefits and no costs? No sensible person would be in any field of endeavor.
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.
Paul, thanks so much for your in depth critique. Since this is a guest post from Eric Kessler, I’ll let him respond and might jump in later.
I really appreciate your thoughtful response.
Paul, thanks for the commentary and pushback.
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.
Thanks Eric. I’ve read the issue brief as well, and may be that I was projecting onto you the more-pointed argument for funders to encourage mergers. (As distinct from increasing collaborations or alliances, something that surely no one would object to because it carries some of the benefits but almost none of the costs that I described above.)
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.
As Business and Legal Advisor to Strategic Philanthropy, Ltd., I thought I’d weigh in on the “playful” debate between Paul and Eric. I think it is critical that the issue of whether non-profits should merge and the impact on the non-profit community should this become the norm rather than an event driven by extenuating circumstances requires some serious thought. Donors should not be encouraged to necessarily “support” an organization merging with another one if there are creative ways to keep both organizations alive and functioning effectively and successfully. Unfortunately too often the rush to judgement by funders and the leadership of organizations is predicated on immediate dire circumstances rather than long term or strategic thinking. We provide our clients with a list of recommended due diligence paraemters to protect their philanthropic investments, we tell non-profits and donors to be sure that they communicate, early on their concerns, needs, parameters and opportunities. Dialogue and transparency can mitigate the need to merge. The contra to this is the reality that there may well be too many organizations in a certain “space” making it hard for donors to evaluate the most effective and impactful grantmaking opportunities.
In a word, Eric and Paul, there are no easy answers.
Thanks for weighing in Susan.
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.
I agree entirely with each of the last two comments. “Mergers should be driven by mission” is the bumper sticker that I wish I’d come up with.
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.
Having recently watched from the sidelines, and been caught in the aftershock, of a merger between 2 NGOs, my concern here is that the motivations for bringing together organizations are often not in the best interests of the onging concern.
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