Mergers and Acquisitions in the Nonprofit World

I don’t know if the pace of nonprofit mergers and acquisitions across the sector is increasing, but I’ve been personally involved in more over the past few years (two) than in the previous fifteen (none). Mergers and acquisitions are still pretty uncommon, I think, and I’m not clear what relationship those trends have to comparable trends in the private sector. The market pressures of the nonprofit sector are notoriously bizarre, and traditional market dynamics like economies of scale and market share just don’t apply in any particularly rational way. For example, because income for many nonprofit comes from philanthropic foundations and from individual donors, revenue often has a tenuous-at-best relationship to the market value of their offering. The value proposition for funders is often divorced from the quality of the service the organization provides, or the efficiency of its work, or the success of its advocacy efforts (although not necessarily divorced from the funders’ perception of those things).

As a result, the market pressures that often lead to mergers and acquisitions in the private sector don’t necessarily play out very consistently in the nonprofit world. But given how hard foundations have been hit by the recession, and given the continuing growth in just sheer numbers of nonprofits (the number of U.S. nonprofit organizations increased by 60% in the decade between 2000 and 2009), we suspect we’ll see more M&A in the coming years.

The first merger I was involved in (as a board member of the nonprofit I ran until 2007) was a solid success. It was really more of an acquisition: we absorbed the strongest programs and the associated program staff but not the other organization’s name or the pieces that didn’t fit well. I think the alignment in mission and organizational culture, as well as the ways in which the programs were complementary, made a big difference. Everyone – the boards and staff – took their time, and everyone on both sides worked pretty hard at building a new sense of camaraderie and shared organizational identity, which also made a big difference.

The second (between Center for Native Ecosystems and Colorado Wild) – a more conventional merger, with a new name and a combined board – is a work-in-progress, but so far everything looks really good. I’m much more of an observer than participant on this one, but they are following a similar playbook: measured and thoughtful, a lot of effort on making the programs and all the systems fit, and a lot of attention on creating a supportive sense of shared organizational culture. It’ll be a while before we get a real verdict, but the indicators are good so far.

But this is anecdotal, and while there is some discussion and a modicum of research (for example, Chronicle of Philanthropy maintains a blog on layoffs and mergers), I think the social sector would do well to invest some energy in learning from our own M&A activities . . . when does it seem to work well, when does it not, what lessons can we draw, and the like. I suspect, as well, that the nonprofit sector could learn a lot from the private sector about thinking strategically about mergers & acquisitions, how to avoid common pitfalls, and about how to make them work.

Bright Ideas Newsletter

Get analysis, insights, and tips on nonprofit leadership and powerful campaigns. No spam. Just smarts!

  • http://jstahl.org Jon Stahl

    Lord o Lord, how I would love to see some hard data on this. Ever since the 2001 dot-com crash, I’ve heard the prophesying of a forthcoming wave of nonprofit M&A, but I haven’t seen it happen. Sure, I can think of a few in my world in the past decade (count ‘em on one hand), but I haven’t seen any real data out there. I think the sector would do well to see a lot more of ‘em.

  • http://brightplus3.com Jacob Smith

    Agreed, Jon. Even a small-n review more focused on case studies would be pretty interesting , I would think.

  • http://www.simplevolution.com Naren

    What you bring up is a broader issue of measurement and reporting tools for non-profits. I wonder if there is any work in progress to identify common industry wide ROI metrics to measure efficient captial use, scale, margins, market share, captialization etc. Without having a common metrix to evaluate non-profits its hard to see large scale mergers, aquistions and spin-offs.

    In many ways this information i asked of non-profits in grant administration processes privately managed by foundations or by government agencies. But even there, I dont see a common understanding of ‘value’.

    Who ever cracks this nut will produce two very compelling outcomes – 1. the ability to possibly develop a common marketplace for non-profit investment (i.e. a non-profit stock market) and the ability for governments and corporations to retreat from being a social entrepreneur (i.e. deliver their own programs etc.) to being a social investor (i.e. investing resources into non-profit sectors, using mutual non-profit investment funds, that reward non-profits based on return on social investment and other industry wide measurement tools)

  • http://www.brightplus3.com Jacob Smith

    No one has really figured it out, Naren, but a bunch of smart folks are trying. You’ll find some good discussions on blogs like Tactical Philanthropy (e.g., http://www.tacticalphilanthropy.com/2011/10/charity-navigator-2-0-in-context). I suspect there won’t ever be any simple answers if only because the scope of work and investment returns is so varied and so resistent to reductionism. Even in the private sector, the type of benchmarks you mention don’t track well across different sectors or contexts. I’m thinking of examples like market share: a small, stable market share in a huge growing market can work better than large market share in a declining market, but in other markets a business’ market share is a critical indicator of health. I think we do need stronger tools for measuring outcomes tied to the work of social sector organizations, but I’m skeptical that we’ll end up with a simple, consistent system. Maybe it ends up looking more like a large menu of conventional assessment tools from which funders and grantees pick an group that makes the most sense given the context.