Why aren’t more voluntary organisations merging?

It’s oft reported that we have little if anything in common with our cousins in the US. But new research from the Charity Commission on the impact of the recession would suggest that not only do we share a common language, but our nonprofit or voluntary organisations share a similar dislike of the idea of merging. In an age of austerity where nonprofits are urged to merge by business leaders and philanthocapitalists on what seems a daily basis, are mergers the nonprofit sector’s own dog that didn’t bark? This is an issue I discussed in The urge [not] to merge, which can be found in the November issue of Charity Finance. By the way, I hope you’ll find some of the links in this blog really useful.

First, the evidence. In The Merger Wave That Never Broke, Chicago Business recently reported survey findings from the US-wide Nonprofit Finance Fund, which found that only 5% of a sample of almost 1,000 organisations had merged or considered merging, despite claims in the same article that many nonprofit managers are ‘intrigued’ by the thought of merger. In a recent Chronicle of Philanthropy article, Professor Paul C. Light of New York University’s Wagner School of Public Service observed that nonprofit groups have tended to shrink the size of their programmes and staff numbers rather than merge, despite his expectation that as many as 100,000 groups might sink and not swim in the choppy waters of a serious downturn.

This low level of interest is echoed by the Charity Commissions’ third Economic Survey of Charities, which found that only 9% of charities have considered merging, collaborating or forming a consortium with another charity. On the upside, this was an increase of 6 percentage points on the previous survey. Incidentally, regular surveys of NCVO members’ confidence report much higher levels of anticipated collaboration, but interest in mergers isn’t a subject that is asked about.

Unlike for the private sector, statistics on the overall level of mergers in the voluntary and community sector are surprisingly difficult to come by – much of the UK literature points to high profile examples, but few numbers. In 2003, Charity Commission research estimated 9,000 charities were the result of mergers over the previous decade, but this estimate hasn’t been updated. As in the US study, a greater number – 11,000 – had considered merger but gone no further. What is clear from research by NCVO and John Mohan of the Third Sector Research Centre is that the number of charities has continued to increase over the long-term, irrespective of recessions, adding grist to the mill of those who think there are too many charities and that there should be more mergers.

So, why hasn’t the anticipated (or should that be hoped for?) increase in mergers accompanied what for the sector might turn out to be a long and difficult period of retrenchment? The financial costs of investigating merger (such as due diligence) and then instigating merger (such as systems integration) are frequently cited, and these are undoubtedly a substantial deterrent for many. Support is available but limited: for example, in the US the Arizona-based Lodestar Foundation has supported a number of mergers with grants of up to $50,000, whilst in the UK The Baring Foundation first established a fund for mergers and joint structures in 1996. In one case the Lodestar Foundation supported the dissolution of a volunteer centre whose services could be carried out more effectively by others. Lodestar has certainly been proactive, but ultimately it can only get so far: its CEO, Lois Savage observed to me that “we are seeing increased requests for grants to support mergers but not in the numbers we expected”. Although the Lodestar Foundation is thinking strategically about the effectiveness of the sector and not just ‘tidying up’, few other foundations have followed its lead.

In the UK, as part of its real help for communities recession action package the Office of the Third Sector recently launched the £16.5 million Modernisation Fund, offering grants of up to £10,000 for organisations wishing to collaborate or merge. Which could fund a lot of mergers, assuming costs are the main barrier.

Costs may well be just the beginning though: in fact, a scan of the nonprofit management literature (which includes numerous specialist texts on merger from the US and the UK) and trade press cites reasons ranging from culture mismatches, distraction from delivery of mission, fundraising concerns (2+2=3), board self-interest and, most damningly, a lack of share options to cushion the blow to departing members of the senior management team. Extreme maybe, but Peter Goldberg, the architect of a number of nonprofit mergers recently argued in a recent Chronicle of Philanthropy article that the rewards of merger are nevertheless not in proportion to the risks a CEO takes.

Another interesting argument from the US is that a lack of intermediaries, equivalent to the M&A teams in investment banks, means nobody is actively looking out for mergers that might produce synergies between organisations. In a report on nonprofit merger and acquisition, the Bridgespan Group argued that foundations should take on a greater role as matchmaker, actively looking for merger opportunities between those they fund. Lois Savage in turn argues that there are not a sufficient number of consultants with expertise to facilitate the merger process.

Given that the evidence from numerous for-profit mergers (such as Time Warner and AOL) is that shareholder value is destroyed rather than created, maybe the problem isn’t so much that nonprofits aren’t merging, but that our expectations of why, when and how much nonprofits should merge are wrong. Which might imply that merging as a strategic response to a crisis – behaviour New Philanthropy Capital research argues is the most common driver underpinning mergers – is unlikely to lead to better outcomes for beneficiaries. As Jo DeBolt, a nonprofit management consultant specialising in mergers, observes in a recent article for Causeplanet:

“Ultimately, the measure of success in a nonprofit merger is not whether the organization simply cut costs and survived (as it might be in the for-profit sector), but whether the merger resulted in its mission being better served.”

Added: see this article by David LaPiana – How to merge wisely