Mergers: Why they work and why they don’t
17 Jan 2018

Mergers: Why they work and why they don’t

17 Jan 2018

Mergers: Why they work and why they don’t

Mergers in the nonprofit sector can bring up conflicting opinions. A merger can be a promise of wild success or of complete failure, and it’s not always obvious which way it’s going to go. But, if planned carefully, you can avoid the pitfalls of mergers and take advantage of the many positives of collaboration across the nonprofit sector.

While the number of for-profit mergers increased after the recent recession, this is not the case in the nonprofit sector. Despite a downturn in giving by private donors and dramatic cuts in government spending, the rate of mergers in the nonprofit sector remained flat1 (See “Nonprofit Mergers by the Numbers” below).

Even though the nonprofit merger rate has stayed steady, it seems like the sector is taking mergers more seriously than before. Funders are better supporting mergers, and more nonprofit executive teams are considering mergers as a regular step in strategic planning. Nevertheless, creating a successful merger is difficult, even for organizations that have done it before.

Despite this evidence of increased awareness and support for mergers, they often fail. But why?

Why Mergers Fail

Five years ago, in a Bridgespan report titled “Nonprofit M&A: More than a Tool for Tough Times” the authors argued that mergers hold far more potential to create value in the nonprofit sector than most people realize. But at least four barriers were preventing that potential from being achieved:

  1. A lack of knowledge about when and how to think about mergers and acquisitions.
  2. A dearth of funding for due diligence and post-merger integration.
  3. A lack of matchmakers to create an efficient “organizational marketplace” through which nonprofits could explore potential merger options.
  4. A tendency to look at mergers reactively, as a route out of financial distress or leadership vacuums instead of proactively as an effective growth strategy.

Since then, the sector has seen at least modest progress on all four issues. Important new resources have become available that provide information on the hows and whys of mergers. One of these is the Nonprofit Collaboration Database, an expanding resource housed with the Foundation Center website, which provides detailed information on more than 650 collaborations nominated for the Lodestar Foundation Collaboration Prize and other collaborations self-reported by participants. Organizations like MAP for Nonprofits and Wilder Research have invested in reports such as “Success Factors in Nonprofit Mergers” (2012) and “What Do We Know About Nonprofit Mergers?” (2011), respectively.

Many deals that might be strategically and financially advantageous turn sour during negotiations. Highly emotional issues like boards, senior staff, and brand can derail even well-planned mergers.  How can nonprofit leaders come to grips with these softer, but very real, challenges? Let’s look at each these three issues in more detail.

How to Make a Nonprofit Merger Work?

Involving the Board

Boards could consider implementing a formal and repeated practice of exploring opportunities for mergers, partnerships, and other types of  long-term collaboration. It should be an annual process of a high-functioning board. Some boards also have standing merger committees to make it easier to act quickly if the opportunity arises.

  • Even when there’s no partner immediately in view, keep mergers and other types of collaboration in mind and review their potential as part of your strategy each year.
  • When a potential collaboration fits your strategy, get to know each other—not just the executive directors, but other senior staff and crucial board members.
  • After the getting-to-know-you phase, start formalizing things. Create a structured planning process with explicit roles for senior staff and the board to ensure that your due diligence is actually diligent. This may also mean including your board chair as the CEO’s thought partner and principal conduit to the board.

Get comfortable

  • Prioritize transparency, and ground conversations in cold, hard facts so the board and the staff learn together.
  • Keep a close eye on the financials, asking questions and sharing the good, the bad, and the ugly with the board.
  • Don’t be pushed into hasty action by a big funder or an artificial deadline. It takes time to make a good merger, and time to put the brakes on a bad one before it’s too late.

Get past emotional traps

Ask senior staff repeatedly for opinions. Never assume you have everyone on board. Ask: “How do you feel? What’s bothering you?” If you don’t have your senior management team with you, you are dead in the water.

  • Identify the toughest issues, including the roles of senior staff and board members, brand identities, and culture. Don’t sweep them under the rug, work through them.
  • Planning should take into account potential structures for staff as well as roles and committees for combined boards.
  • Get outside help, not just on the financial questions, but for softer subjects like organizational structure and branding. Skilled facilitators can add real value. Sometimes funders will help pay for this outside support, even if they don’t have an explicit merger support program.

Remember that mergers aren’t the only form of collaboration. Joint ventures to share space, back-office functions, or specialized programmatic functions can also be a way to achieve economies of scale without giving up organizational independence or identity.

Integrating senior staff

A second emotionally charged hurdle is planning for the future of the organization’s senior staff.

When two organizations that are close in size merge, it is often to gain economies of scale. Such mergers inevitably make some roles redundant, and it’s hard to find roles for all senior staff. Indeed, one of the most important questions that nonprofit leaders face in planning a merger—especially a merger of equals—is that of their own futures. In the nonprofit sector, executives rarely enjoy golden parachutes, and they have no stock options to cash in for a healthy post-merger profit. Unless senior staff want to retire, plan to move on, or are amenable to a subordinate position in the merged organization, the risk to their own future can kill merger talks.

No matter how the merged organization plans to handle senior staff, crafting a plan that the staff itself considers fair and in the organization’s best interests is a critical step if the parties are to actually tie the knot.

Stewarding the brands

A final obstacle that can derail merger deliberations, even when all else is aligned, is brand stewardship. In the case of corporate mergers, especially those that serve consumers, the advantage of preserving a strong brand identity is obvious. Strong brands create customer loyalty. When snack and cereal maker Kellogg acquired biscuit company Keebler, for example, the company hung onto Keebler’s trademark elves. For nonprofits, brand is often important as well. It may count with funders, elicit trust from clients, and attract volunteers, board members, and talented staff. Brand can impact an organization’s self-image and culture.

Because of this, brand can be a lightning rod during a merger. There are three ways to ground the emotional charge. One is for the acquiring organization to retain the brands of the acquired organization. An example of this is when PepsiCo acquired Frito-Lay, Pizza Hut, and KFC. Another is to merge the acquired brands into the existing one, as Cisco Systems did with the networking companies it has acquired. A third approach is to merge under a new, often combined, name, like Citigroup, which from the merger of Citibank and Traveler’s Group.

In short, brand matters. Preserving the equity of a merger candidate’s brand can help to avoid stumbling blocks. Nonprofits often preserve brand equity through maintaining both names in some recognizable form, whether as combinations or sub-brands. In some cases, it’s possible to consolidate under one brand and bring constituents along, but it takes humility and solid communication before, during, and after absorbing one brand into another.

How funders are involved

When successful, a merger can help expand a nonprofit’s programs, capabilities, reach and revenue. It can improve the organization’s cost structure, benefiting the people and communities it serves. That’s why it’s so important that funders support mergers and learn to navigate all the obstacles along the way—including the softer traps.

To this end, funders have several responsibilities. These include capturing, codifying and sharing know-how on forms of alliances, connecting grantees that could become more than the sum of their parts, and providing financial support for the due diligence and integration costs that accompany a merger. But funders should also serve as trusted advisors and thought partners to confront the emotionally charged traps.

At the same time, funders should enable collaboration that can lead to mergers, while avoiding forcing deals. If you force a shotgun marriage it comes back to haunt you. A merger has to be developed on trust. The best thing a funder can do is create an environment where organizations get to know each other and develop trust. You need to be very careful if funders try to force mergers – it may work for a couple of years, but will likely fall apart.

The collaboration alternative

Short of an actual merger, nonprofits can use a range of alternatives to align with others and achieve greater impact.

  • Best practice sharing: Advances sector knowledge by promoting innovative approaches and sharing lessons learned.
  • Coalition: Aligns a group of like-minded organizations around a common, agreed upon goal.
  • Formal partnership: Allows two or more organizations to be committed to shared goals without integrating organizational functions.
  • Joint venture: Integrates partnership of two or more organizations in a new legal entity, owned by the partners.
  • Sharing services: Enhances economies of scale, generally for cost savings, revenue sharing, or service enhancement.

Each alternative carries tradeoffs in autonomy, risk, and investment required. For example, coalitions can spend tons of energy keeping members aligned, but they can be slow to achieve meaningful impact. Partnerships can be strengthened through formal memos of understanding and processes. Without integration, however, there is no guarantee the relationship will continue. Shared services will probably require significant legal and operational alignment, meaning cost, revenue and other benefits may only come about in the long term.

When planning collaborations, organizations need to consider the pros and cons of each structure. Ultimately, the right approach depends on the goals of the collaboration and the parties involved.

Or Consider…Nonprofit Dissolution

There are several steps involved in nonprofit dissolution. Simply allowing the registration with the Secretary of State’s Office to lapse is not enough. Consult a professional if you’re thinking about dissolution.

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