Mergers and Acquisitions

This post is by Jacob Smith, co-author of the The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit.  The book is so awesome that I asked Jacob to post adapted excerpts from it here for you, every Friday for ten weeks.  This is the final post in the series – THANK YOU so much to Jacob for the great excerpts.  If you have not yet bought the book – buy it.  It rocks.

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Your organization might be redundant.

There is a remarkable amount of specialization and diversity among nonprofits. There is a nonprofit specifically dedicated to sending red rubber clown noses to soldiers in Iraq. There is an organization that focuses exclusively on protecting the Black Warrior River in Alabama. One nonprofit builds schools in three specific rural Ethiopian villages, while another exclusively supports the Louverture Cleary School near Port-a-Prince, Haiti. Nonprofits tend to be idiosyncratic and tied to particular people, places, and passions. They see themselves as independent and unique. And we see a lot of value in diverse, nimble, and specialized organizations narrowly focused on the pressing community needs for which they are deeply passionate.

The number of nonprofits out there is staggering. The number of U.S. nonprofit organizations increased by 60% between 2000 and 2009. This is a stunning development. It is increasingly hip to do good.

It all adds up to a crowded nonprofit ecosystem. Because the market pressures of the nonprofit sector are notoriously bizarre, and because traditional market dynamics like economies of scale and market share just don’t apply in any particularly consistent, rational way, we don’t know if the result will be a dramatic and sustained increase in mergers.

But funders frequently lament the number of nonprofits, the extent of overlap in their missions and services, and the increasing difficulty in securing stable revenue sources for all of them. Funders also seem increasingly interested in applying private sector ideas to the nonprofit sector. Consequently, we wouldn’t be surprised to see funders pushing more aggressively for nonprofit consolidation. And organizations themselves might have to seize opportunities to improve their effectiveness by joining forces with other outfits—or be forced to consider drastic measures out of simple financial necessity. As a result, we suspect that mergers and acquisitions, which are relatively common in the private sector, will also play a greater role in the nonprofit sector.

This may not be a bad thing.

There are some hazards, of course. Mergers and acquisitions that result from economic desperation are probably less likely to offer strategic, mission-related advantages. All of the challenges of combining organizations are exacerbated when they take place under duress. The struggling organization may have already lost its best staffers (and those who remain are often fried), and by the time they concede defeat and start looking for a suitor, the value of their programs, networks, and brand is often severely depleted, as well. Desperation-driven mergers and acquisitions aren’t necessarily disasters waiting to happen, but caution is warranted.

There can be some real advantages to mergers and acquisitions, however, despite the pitfalls. We were part of one very successful acquisition (although the nonprofit version is probably more like an “absorption” than an acquisition) between Center for Native Ecosystems and another conservation organization working in the same region. The organizational cultures were similar, many of the staff had worked closely together for years, their respective program efforts aligned with and supported each other, and in the process they were able to drop programs and projects that didn’t fit well within the newly configured organization. And Center for Native Ecosystems subsequently merged with another, similarly-sized nonprofit; all indications so far suggest that this consolidation will work out as well as the first. The successful merger of Denver’s Museum of Contemporary Art and the Lab at Belmar is another example. A combination of shared values, compatible organizational cultures (including a mutual willingness to experiment and push the boundaries of the traditional art museum), complementary strengths, and an across-the-board commitment to craft a new, comprehensive vision have all played a part in making the consolidation work.

As these examples show, the best marriages are between like-minded and complementary nonprofits with similar organizational cultures. They can produce greater efficiencies and better-coordinated service delivery, and put more effective political pressure on decision-makers (or create a more robust and successful cultural center, as in the case of the museum).

Bad marriages also abound. As anyone who has introduced new chickens to an established coop knows, mergers and acquisitions are inherently risky. Disruption rules the roost. Efficiencies, one of the prime arguments for business consolidation, don’t always materialize. Potential benefits, like greater communication and cooperation, can easily be outweighed by the most mundane causes, like personality conflicts.

In one case, a large public interest law firm absorbed a much smaller one. The larger firm was conservative in its litigation approach, formal in its organizational atmosphere, and its decision-making process was slow and complex. The smaller firm had a very different organizational culture and strategic instincts. Both firms were well respected, with strong track records and high quality attorneys. But most of the staff members from the smaller firm were gone within the year and the merger added little value to the community.

Still, healthy marriages do happen, and the odds increase if both partners give the courtship all the attention and thoughtfulness it deserves. They happen over time with much care and forethought. They are characterized by a willingness to set aside narrow organizational loyalty in the service of the mission. The staff and boards of the organizations know and learn to trust each other. Recognize that the best mergers and acquisitions are a lot like complicated courtships, and you will enter into the process with your eyes wide open.

Our advice: always remember that your organization is just a vehicle for advancing the mission. The organization’s mission should be its mission—not maximizing the group’s longevity or protecting your role as the executive director. Be open-minded and strategic about ways to be more effective in advancing that mission, whatever it is. Sometimes that may involve creative resource sharing or resource leveraging with other organizations, and sometimes it may involve a merger or acquisition.

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(photo credit)