Nonprofit Mergers Since the Great Recession & Implications for Post-COVID Strategy: Part Two

In part one we discussed the lessons learned for non-profit providers since the Great Recession. This included the decline in funding since the Great Recession and the post-COVID funding future which projects to be even worse. Our key mission as non-profit organizations is to provide critical services, especially in times of great need — and to do this in a world where traditional fund-raising, past operating expertise, and other turnaround strategies simply won’t work.

JGA’s twenty-six merger and consolidation projects since the Great Recession provide a deeper analysis of the nonprofit operating environment and how that difficult environment affects the motivations for, and practices of, nonprofit consolidation. Our team has facilitated hundreds of meetings with nonprofit boards, prospective partner organizations, and worked hand in hand with the CEOs and dedicated merger or partnership committees of these organizations.

Based on these projects, JGA’s teams have observed that stakeholders often begin consideration of restructuring/merger discussions based on their impressions from their own experiences and/or media coverage of corporate mergers. Yet we find that there are several fundamental misconceptions about nonprofit mergers based on over-reliance on private sector practices. While motivations for nonprofit consolidation vary, we have found three particular misconceptions about motivation and purpose. Indeed, nonprofit consolidations are not driven by the same motivations, methodologies, or end goals as private sector mergers. It is critical to understand actual motivations because these motivations will drive the analysis of benefits, due diligence processes, and the final structure of the deal. Going in understanding both motivations and misconceptions of nonprofit consolidations is critical for a nonprofit leader.

Leading to a discussion of consolidation as a strategic solution in installment 3, this article dissects three prominent myths of and misconceptions of nonprofit consolidation that we have encountered in our projects.

MISCONCEPTION #1

The first of these misconceptions is about motivation. Corporate merger and acquisition practice (M & A) seeks to strengthen some combination of profitability and shareholder value, by improving the strategic position of the corporation. Yet we have observed that at least 50% of the nonprofit restructures we have worked on have been primarily motivated by a desire for program and service continuation, in the face of a resource-poor operating environment. In short, they seek to continue the civic-nonprofit mission to build a better community and assure the continuation of valuable community services. This motivation is logical, because the financial picture described in the 2018 financial study of the nonprofit sector[1] clearly describes an operating environment in which it is extraordinarily difficult to invest in the sorts of robust systems

that would allow any organization to efficiently perform its critical functions — from contracting and fundraising, to service delivery, to HR and IT practices. Typical corporate M&A motivations simply don’t apply in most nonprofit restructures or consolidations, as the revenue sources, profit-margins, and shareholder benefits simply don’t apply.

The difference in corporate versus nonprofit motivation for partnerships is summarized in the table below.

Table 1: Comparison of Motivation for Merger/Consolidation between Profit and Nonprofit Sectors

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In summary, a strategic fit is critical for both corporate and nonprofit mergers and acquisitions. And, there are systems efficiencies gained with increased scale and reduction of duplicative functions in nonprofit consolidations as well. Yet the driving motivations between the sectors are different beyond those entry-level criteria, even with respect to the magnitude of the benefits.

MISCONCEPTION #2

Often the key asset in a nonprofit is its people, and the biggest driver of post-partnership benefits is the high value of the experienced and mission-driven staff. Misconception #2 about nonprofit mergers regards staff retention.

Since nonprofits serve community needs, we have not seen resulting entities reduce front line staff. There is simply no call for nonprofits to reduce service levels, rather, there is a constant need to increase service levels. Because the vast majority of nonprofit jobs are service delivery or program jobs, as opposed to administrative jobs, this translates into very little job loss in nonprofit consolidation and merger transactions (if there are staff reductions or redeployments, these are sought outside of programs). Many of the smaller organizational consolidations for which we have consulted have had zero job loss.

To the extent that there are jobs lost in nonprofit consolidations and mergers, we observe the following characteristics:

· An Executive Director or CEO position is eliminated. This may be due to an interim Executive in place, or alternatively an Executive who voluntarily resigns/eliminates their own position, by putting the good of the community above their self interest in keeping their job. While an executive may see the opportunity and therefore agree to or promote the elimination of one of the CEO positions, in many cases, the ED or CEO is offered a senior executive position in the consolidated organization.

· Some savings in elimination or reduction in administrative positions such as finance, human resources, information technology.

· A position is eliminated, but staff is offered another job in the organization: In larger nonprofit consolidations where there may be some benefit to reductions in the administrative departments, we have seen several deals where the remaining organization finds positions that are unfilled and can reassign employees to open roles.

MISCONCEPTION #3

A large body of research and literature shows that approximately seventy-five percent of corporate mergers are not successful because staff, internal systems, and cultures have not been fully integrated or optimized after the merger. Yet what such analyses doesn’t cite, is whether the share price of the corporation indeed increased, and shareholders benefitted[2]. As noted in Table 1 above, motivations for corporate mergers are primarily based in profit potential. And with that as the primary motivation, such corporations wouldn’t necessarily have the motivation to invest adequately in post-merger integration to achieve what they may perceive to be secondary goals.

Conversely, we believe the data is clear that nonprofit mergers work. In 2019, we invited a sample of Executive Directors and CEOs of the organizations from which the case study findings in this article are derived to speak to a group of over 30 youth provider nonprofit organization executive leaders (with budgets ranging between $250K-$25M). These leaders are in an intensive sector conversation about both the systemic challenges for and survivability of their organizations. When asked the question of

nonprofit mergers and partnership — “Would you do it again?” — these executive leaders unanimously stated “Yes, absolutely.” One of these CEOs stated that he is very comfortable knowing that in 50 years, long after his passing, the services he is proud of helping to conceive and grow in his organization will still be around, provided by the parent organization. His comment on the significance of preserving the organization’s mission, as well as the experiences of many others cited herein, speak to the clarity of what nonprofit partnerships, consolidations and mergers seek to accomplish. Our experiences with nonprofit consolidation and mergers confirms and deepens the still limited information available in nonprofit literature, that the goals of consolidation have indeed been achieved if the services survive because the new or remaining organization is financially solvent and viable for the long term.

Notwithstanding overall successes in these merger processes, and while we are a strident advocate for investment in post-merger integration of staff, departments, and systems, we have seen that even large nonprofits have financial limits in how much they invest in post-merger integration, because even large nonprofits have financial limitations. Thus, we don’t feel that success with post-merger integration is, by itself, the single most appropriate benchmark for gauging success of the deal. Rather it is a best practice. The facts that the services remain, that some efficiencies have been gained, that revenues can be raised more easily, are all reasons these CEOs say they would do the deal again.

Our next article will dive into the benefits of non-profit consolidations, and why the CEO’s we worked with are pleased they made the decision.

Click here to read full paper.

About the Author

Jan Glick is a nationally-recognized nonprofit organizational development expert with over 30 years supporting hundreds of nonprofit organizations through transition and change. Author of Nonprofit Turnaround, A Guide for Nonprofit Leaders, Consultants and Funders, Mr. Glick has facilitated 32 structured partnerships, joint ventures and mergers, involving 77 discrete nonprofits, employing different legal and organizational structures, from all-volunteer organizations up to $50M+ agencies, and several within a regulated environment.

www.janglick.com

[1] The Financial Health of the United States Nonprofit Sector, by Oliver Wyman, Sea Change Capital Partners and GuideStar, 2018

[2] At the announcement of a merger, generally the acquiring company stock price or valuation drops, and the company being acquired goes up in price because the market assumes it is being bought at a premium. However, in the long-term the acquiring company generally increases stock or enterprise value.

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