Why Nonprofit Mergers Continue to Lag (SSIR) (2024)

The recent economic recession triggered consolidationin a raft of for-profit service industries, from airlinesto financial institutions, as companies soughtto create more cost-efficient operations and broadentheir customer reach. Not so in the nonprofit sector.Despite a downturn in giving by private donorsand dramatic cuts in government spending, accordingto our research the rate of mergers in the nonprofit sector remainedflat.¹ (See “Nonprofit Mergers by the Numbers” below.) Meanwhile, the number of US nonprofits actually grew 7 percentbetween 2007 and 2011 to 1.58 million, an average of nearly 40nonprofits per US zip code.²

The reason that nonprofit mergers continue to languish isn’tthat they don’t make sense. Quite the contrary. Nonprofit mergersand acquisitions are often an effective way to deliver more andbetter services at lower cost. Take Arizona’s Children Association(AzCA), a child and family services agency. This nonprofit has sevenacquisitions under its belt, each cutting costs up to 40 percent andincreasing the number of beneficiaries as much as 100 percent.³ Inthe process, AzCA grew revenue threefold, from $12 million in 1998,before it began its acquisitions, to $36 million in 2012.

(Illustration by Tang Yau Hoong)

Or consider Crittenton Women’s Union, which helps womenand their families move from poverty to economic independence.The organization is the result of a 2006 merger of two large andlong-established Boston nonprofits serving disadvantaged women.Says Elisabeth Babco*ck, president and CEO of Crittenton Women’sUnion, “We took these two platforms and bone structure and putthem together in a way that allowed us to drive ahead new workand a new agenda. We would have never had the organizational orfinancial capacity to do this [without merging].”

Even though the nonprofit merger rate is static, we see evidencethat the sector is taking mergers more seriously than before. Fundersare improving the support they provide for mergers, and more nonprofitexecutive teams are considering mergers as a regular stepin strategic planning. Nevertheless, creating a successful mergerremains difficult, even for organizations that have done it before.

Nonprofit Mergers by the Numbers

Despite evidence of increased funder awarenessof and support for the strategic value ofnonprofit mergers and acquisitions, our analysisof legal merger activity in Arizona, Florida,Massachusetts, and North Carolina between2007 and 2012 does not hint at a rise in overallnonprofit mergers. The Bridgespan Groupperformed an analysis on legal merger filingsfrom 1996 to 2006 and then compared thelater five years, 2001 to 2006, to merger filingsfrom 2007 to 2012 in the same four states. Wefound little change in merger rates.

In Arizona, Massachusetts, and North Carolinathe number of merger filings over the sametime period had increased. But when divided bythe average number of organizations for eachfive-year period, cumulative merger rates inthose three states remained unchanged comparedto the previous five years. That’s becausethe rate at which new nonprofits were formedkept pace with the increase in merger activity.

Florida was the only state that experienceda falloff in the number of legal mergers overthe period and a significant drop in its mergerrate, largely because the number of nonprofitsin the state grew significantly—15,000 new501(c)(3)s were established in the recent five-yearperiod. The net result was a 30 percentdrop in the cumulative merger rate.

Debra Jacobs and Pam Truitt of the PattersonFoundation—which facilitates conversationsamong organizations considering workingtogether—hypothesize that the influx ofwealthy people and baby boomers who moveto Florida and want to start socially driven secondcareers might be the primary driver of theproliferation of nonprofits in the state. Suchphilanthropy is highly personal, and combiningforces with others can be seen as failure tolaunch and grow a philanthropic vision.

We also performed a more detailed analysisto understand how merger activity differedby revenue and field. Judging from Massachusettsdata—similar to the findings fromour previous article—legal mergers continueto be most pervasive and increased significantlyamong organizations in the child andfamily services field. A second significantobservation from the Massachusetts datawas the emergence of a dominant type ofmerger—large nonprofits rolling up smallernonprofits. The number of mergers betweenlarge and small nonprofits doubled in the lastyears; mergers between larger and mediumnonprofits also increased 1.5 times.

During our research, we interviewed nonprofit merger veterans,their funders, and intermediaries. We found unanimity around threeemotionally charged issues that can surface after merger talks beginand derail the effort: creating alignment within the boards, definingroles for senior staff, and blending the brands. These three traps cansink discussions between otherwise mission-aligned partners. Inshort, there has been some progress in developing a favorable funderecosystem, tools, and proactive merger strategy, but nonprofits needto do a better job navigating the three softer traps if they are goingto turn their increased skill to merge into a will to merge.

Why Mergers Fail

Five years ago, we argued in a Bridgespan report titled “NonprofitM&A: More than a Tool for Tough Times” that mergers hold farmore potential to create value in the nonprofit sector than mostpeople realize.⁴ But at least four barriers were preventing that potentialfrom being achieved:

A lack of knowledge about when and how to think about mergersand acquisitions.
A dearth of funding for due diligence and post-mergerintegration.
A lack of matchmakers to create an efficient “organizationalmarketplace” through which nonprofits could explore potentialmerger options.
A tendency to look at mergers reactively, as a route out offinancial distress or leadership vacuums instead of proactivelyas an effective growth strategy.

Since then we have seen at least modest progress on all four issues.Important new resources have become available that provideinformation on the hows and whys of mergers. One of these is theNonprofit Collaboration Database, an expanding resource housed withthe Foundation Center website, which provides detailed informationon more than 650 collaborations nominated for the Lodestar FoundationCollaboration Prize and other collaborations self-reported byparticipants. Organizations like MAP for Nonprofits and Wilder Researchhave invested in reports such as “Success Factors in NonprofitMergers” (2012) and “What Do We Know About Nonprofit Mergers?”(2011), respectively. And nonprofit merger advisor La Piana has grownits online collection of tools and publications on nonprofit M&A.⁵

Although still relatively small, new sources of funding are flowingfor merger due diligence and integration. In the past few years,Boston, New York, Los Angeles, Charlotte, N.C., and other citieshave established philanthropic funds that make grants to covermerger costs or provide technical assistance for potential mergersor other collaborations. Foundation Center records show thatgrants for mergers have increased on average about 18 percent peryear in real terms, to $5.3 million in 2011, up from $1.4 million in2003.⁶ The total amount of money dedicated to supporting mergersremains small, but it is growing. And foundations increasingly embracematchmaking, organizing “meet and greets” among granteesso they can get to know each other and explore synergies.

Involving the Board

When AzCA’s new CEO, Michael Coughlin, approached his boardof directors about a possible merger, the organization had alreadyundergone a series of mergers under its long-serving prior CEO FredChaffee. But the deal Coughlin was considering in 2012—a potential“merger of equals” with Child and Family Resources (CFR)—wasbigger than anything AzCA had yet contemplated.

Ingrid Novodvorsky was on the board at the time and becameAzCA’s chair shortly afterward. “We talked as a board about thecriteria we’d need for a potential partner statewide,” she recalls.“The one that emerged as the candidate was Child and FamilyResources. We’d partnered with them on grants. We weren’t strangers.In May our new CEO brought reasons why this was a fit, andwe authorized him to do financial due diligence.” The board hireda merger consultant to advise on process.

Merger talks proceeded, with an initial focus on alignment ofmission, values, and culture. But then something happened thatbroke trust between the board and staff. AzCA and CFR had justbegun to share financial data and prepare a pro forma budget for amerged organization when several members of AzCA’s senior managementteam brought concerns about the viability of the mergerto the board. Given the mixed signals—a CEO who supported themerger and dissenters on his team who opposed it—the AzCA boardended the merger talks, and Coughlin subsequently left the agency.

Looking back, Coughlin, now CEO of Tri-County CommunityAction Program in New Hampshire, says he learned from the experience.He faults himself for taking on a big merger too soon intohis AzCA tenure, before he had time to fully earn the trust of his26-member board and his senior staff (an observation reinforced byfindings of a Catalyst Fund report on the average tenure of mergerleaders).⁸ This deficiency was exacerbated by the fact that not all theboard members showed up for each meeting. “I should have been incontact with the whole board much more frequently, and I shouldhave been there a lot longer before I suggested this,” says Coughlin.

Novodvorsky says that the board’s critical concern was transparency.Instead of just hearing high-level presentations, the boardneeded to get familiar with the details: meeting minutes, balancesheets, and financial reports. With data, says Novodvorsky, a boardcould calibrate concerns from other quarters. “We had a mergercommittee, but they didn’t have early access to the data.”

Not all mergers flounder at the board level. An example of successfullynavigating board thickets is the 2006 merger of Crittenton Inc. and TheWomen’s Union. Crittenton, founded in 1824 as the Boston Female MoralReform Society, was a leading service agency for women and families. TheWomen’s Union, founded in 1877 as the Women’s Educational and IndustrialUnion, was an advocacy organization conducting programs and researchfocusing on the social and economic challenges faced by low-incomewomen and their families.

Despite the obvious challenge of bringing together two agencieswith strong cultures and more than 300 years of history betweenthem, there were compelling reasons for a merger. The two agencieshad complementary strengths: Crittenton was stronger in direct services,whereas The Women’s Union brought expertise in research andadvocacy. Crittenton had sizable assets in the form of Boston-areareal estate, and The Women’s Union had cash. Moreover, both CEOswere retiring, offering a chance for new leadership of a combined organization.But, says Babco*ck, who was hired to oversee the mergerin 2006 and is president and CEO of what is today called CrittentonWomen’s Union (CWU), “the board merger was the hardest part.We had two organizations with different board cultures and differentperspectives on what was needed in the new organization.”

Babco*ck and her chairman aligned the merged board to CWU’smission through board member turnover and dilution. Each boardchose seven members for the combined CWU board. “I was fortunatethat board leadership didn’t shy away from confronting the toughissues—for example, individual board members and their roles,” saysBabco*ck. “We created a shared mission and vision, worked hard onhow the board role should lead and support that vision, and transitionedoff the board members who couldn’t realistically be a part ofthe new vision and role of the board.” As of January 2014, six of theoriginal 14 members were still on the board, along with 12 new members.“The refreshing of the board is a critical element to creating aboard that partners with your evolving organization,” says Babco*ck.

CWU continues to look for merger opportunities, but prospectshave been limited. “Since we merged, we have had discussions withfive organizations we would have liked to bring into a partnership, andthey have all walked away,” says Babco*ck. “In every instance they’vesaid, ‘I don’t think it’s really what we want.’ And in every instance,their board was the barrier. Someone says, ‘I cannot be the board chairwho presides over the elimination of my organization.’” In Babco*ck’sview, the problem is that boards see themselves as “the keepers of thesacred flame of mission, and the idea of furthering the mission apartfrom furthering the organization in its existing structure is very hardfor them. They cannot separate these two to look strategically at howthey might create more mission impact by changing the organization.They have conflated the mission and the organization.”

Keeping Merger Talks on Track

Getting started | John MacIntosh of NewYork Merger, Acquisition, and CollaborationFund recommends that “boards could considerimplementing a formal and recurringpractice of revisiting the opportunities formergers, partnerships, and other types offormal, long-term collaboration as a meansto further their organization’s mission at leastonce a year. It should be an annual process ofa high-functioning board. Some boards alsohave standing merger committees to make iteasier to act quickly if the opportunity arises.”

Even when there’s no partner immediatelyin view, keep mergers and othertypes of collaboration in mind and reviewtheir potential annually as part ofyour strategy.
When a potential combination fits yourstrategy, get to know each other—notjust the executive directors, but othersenior staff and crucial board members.
After the getting-to-know-you phase,start formalizing things. Create a structuredplanning process, with explicit rolesfor senior staff and the board to ensurethat your due diligence is actually diligent.This may also mean including your boardchair as the CEO’s thought partner andprincipal conduit to the board.

Getting comfortable | Maya Enista, formerCEO of Mobilize.org, a membership organization,says, “For some members, we framedthe merger in a very personal way, focusingon benefits to individual students. For otherswith a finance background, we emphasizedpotential financial benefits.”

Prioritize transparency and ground conversationsin cold, hard facts so theboard and the staff learn together.
Keep a close eye on the financials, askingquestions and sharing the good, the bad,and the ugly with the board.
Don’t be pushed into hasty action bya big funder or an artificial deadline. Ittakes time to make a good merger, andtime to put the brakes on a bad one beforeit’s too late.

Getting past emotional traps | MichaelCoughlin, former CEO of Arizona’s ChildrenAssociation, wishes he had pressed his seniorstaff harder to understand what doubtsthey might have. “If I were to do anything overagain, I would be relentless in going back topeople and asking How do you feel? What’sbothering you? If you don’t have your seniormanagement team with you, you are deadin the water.”

Integrating Senior Staff

A second emotionally charged hurdle is planning for the future ofthe organization’s senior staff. Before Coughlin joined AzCA, hewas CEO of Goodwill Industries of Northern New England, wherehe had completed two mergers. One of the reasons that these weresuccessful is that he found room at Goodwill for the important seniorstaff of the acquired organizations. “We added the other CEOto my senior team, found roles for other members of their team,and lowered cost through attrition over the years,” says Coughlin.Novodvorsky, chair of AzCA’s board and a former board member ofone of the organizations AzCA acquired, says that most staff in theacquired organization were given roles at AzCA following the merger.

It’s important to note that these were essentially acquisitions bylarge organizations of smaller ones that eventually became separateprograms or business units within the larger acquirer. The objectivewas program and revenue growth. The smaller acquisitions broughtnew expertise, clients, and potential access to funding, fueling theacquirer’s growth. This made it easier to find roles for senior staff.Following the merger of the $40 million Goodwill chapter withTraining Resource Center, a $4 million workforce developmentnonprofit, “We became able to compete for contracts that neitherone of us could before, and the combined organization grew to $60million,” says Coughlin.

In contrast, when two organizations that are close in size merge,it is often to gain economies of scale. Such mergers inevitably makesome roles redundant, and it is harder to find roles for all senior staff.Indeed, one of the most important questions that nonprofit leadersface in planning a merger—especially a merger of equals—is that oftheir own futures. In the nonprofit sector, executives rarely enjoygolden parachutes, and they have no stock options to cash in for ahealthy post-merger profit. Unless senior staff want to retire, planto move on, or are amenable to a subordinate position in the mergedorganization, the risk to their own future can kill merger talks.

Consider the 2010 merger of equals of Mobilize.org and GenerationEngage, two small national organizations working to mobilizeMillennials. Generation Engage had a staff of six and a $700,000budget; Mobilize.org had three staffers and a $500,000 budget.Generation Engage leader Decker Ngongang and Mobilize.org leaderMaya Enista knew each other before they began discussing a merger.“We both went to the same conferences and were always the youngestpeople there,” says Ngongang. “We ended up working togetheron a couple of campaigns. The level of engagement increased betweenour organizations and constituents to where it made senseto stop competing for funders. We started talking, and going outto coffee, and discussing how we could partner even more deeply.”

“Decker and I really liked each other,” says Enista. “Most important,neither of us was a founder. We were able to approach thiswith distance about what’s best.” Adds Ngongang, “We sat down,mapped it out. We brainstormed on how we would talk to our respectiveboards and funders, what were the politics that needed tohappen, questions the board would ask.”

Though Generation Engage was slightly larger, Mobilize.orgended up as the acquiring organization. Ngongang was amenable toa subordinate position. Enista stayed on as the head of the mergedorganization and Ngongang became vice president of programs.“It was not even a question about my becoming a co-leader,” saysNgongang. “I thought it was crucial to focus on the work instead ofwho is the most important.” Three years later, although both havemoved to new roles in other organizations, Enista and Ngongang saythe merger is a success. “We did a survey of our membership,” saysEnista. “No one saw any change or disruption. Our budget doubled,our staff tripled. We were able to extend our reach.”

These two young leaders agreed to work together in the newlymerged organization, but for many nonprofits one of the rationalesfor a merger is that at least one merging organization’sleader is ready to leave. MAPfor Nonprofits, in its 2012 study of 41 Minnesotanonprofit mergers, reported, “For 80percent of the mergers, an executive directorhad recently left or was soon to retire in atleast one of the pre-merger organizations.”⁹

Whether a merger results in reassigningroles, creating graceful exits, or developingnew leadership positions in the merged entity,crafting a plan for senior staff that thestaff itself considers fair and in the organization’sbest interests is a critical step if theparties 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 corporatemergers, especially those that serveconsumers, the advantage of preservinga strong brand identity is obvious: strongbrands beget customer loyalty. When snackand cereal maker Kellogg acquired biscuitcompany Keebler, for example, howeversweeping the back-office changes, the companyhung onto Keebler’s trademark elves.For nonprofits, brand is often importantas well. It may count with funders, elicittrust from clients, and attract volunteers,board members, and talented staff. Brandcan also be about how an organization seesitself—and integral to a nonprofit’s culture.

Because of this, brand can be a lightningrod during a merger. There are three waysto ground the emotional charge. One is for the acquiring organizationto retain the brands of the acquired organization, as PepsiCodid when it acquired Frito-Lay, Pizza Hut, and KFC. The other is tomerge the acquired brands into the existing one, as Cisco Systemsdid with the networking companies it has acquired. A third approachis to merge under a new, often amalgamated, name, like Citigroup,the entity formed from the merger of Citibank and Traveler’s Group.

Take, for example, New York’s Hillside Family of Agencies, whichgrew the reach of its mission to help at-risk youth through ninestrategic mergers. Hillside has taken the PepsiCo route, turningacquisitions into business units that bear the name of the formernonprofit, such as Crestwood Children’s Center, Snell Farm Children’sCenter, and Hillside Children’s Center. In Boston, two wellestablishednonprofits chose a similar approach. The PhilanthropicInitiative (TPI), founded in 1989, is a nonprofit advisory team thatdesigns, carries out, and evaluates philanthropic programs for individualdonors, families, foundations, and corporations. In late 2011,TPI merged with the Boston Foundation, one of the oldest and largestcommunity foundations in the country.

After the merger, which fully combined both assets and income,the two agencies nevertheless remain distinct brands. Though nowa unit of the Boston Foundation, TPI has its own logo, website, anddistinct array of services. “TPI is a national, philanthropic, consultingfirm, and the Boston Foundation is local,” says Kate Guedj, theBoston Foundation vice president who oversaw the merger. “In thelocal market, we use the two brands together, but nationally TPI ismore prominent, with clients all over the country and the world.”

CWU, on the other hand, took the Citigroup route—blending thepeople and programs from each merging entity under a new corporatename, an amalgam of two merging brands. “It’s a mouthful,”said CEO Babco*ck, “But when our market researchers tested theoriginal names of each organization with the public, they both haddistinct and important followings, so we wanted to preserve them.”

In short, brand matters, and crafting a plan that preserves theequity of any merger candidate’s brand can circumvent a stumblingblock to completing the deal. Most often nonprofits preserve brandequity through maintaining both names in some recognizable form,whether as combinations like “Crittenton Women’s” or sub-brandslike TRC at Goodwill of Northern New England. In some cases, suchas Mobilize.org, it’s possible to consolidate under one brand and bringconstituents along, but it takes humility and deep investment in communicationbefore, during, and after absorbing one brand into another.

A Growing Role for Funders

When successful, a merger can help expand a nonprofit’s programs,capabilities, reach, and revenue. It can improve the organization’scost structure, benefiting the people and communities it serves.That’s why it’s vital that funders continue to invest in supportingmergers and learn to navigate all the obstacles along the way—includingthe softer traps.

To this end, funders have several critical responsibilities. Thesecontinue to include capturing, codifying and sharing know-how onall forms of alliances, connecting grantees that could become morethan the sum of their parts, and providing financial support for thedue diligence and integration costs that must accompany a merger.But their duties should also include serving as trusted advisors andthought partners to confront the three emotionally charged traps.

At the same time, funders need to be careful to strengthen anecosystem that enables collaboration that can lead to mergers, ratherthan forcing deals. “Everybody has learned that if you try to forcea shotgun marriage it comes back to haunt you,” says Savage. “Amerger has to be developed on trust. The best thing a funder can dois create an environment where organizations can get to know eachother and develop this trust.”

Consider Boston’s Catalyst Fund for Nonprofits, a partnershipof four major Boston-area funders and the Kresge Foundation, createdto support local mergers and collaborations. Over the past twoyears the Catalyst Fund has given out 25 awards. These allowedorganizations to hire consultant experts for feasibility planning,assessment, and implementation for collaborations, including mergers.¹⁰ By late 2013, the Catalyst Fund had supported 12 prospectivemergers, eight of which have been implemented. Offering a rangeof support to potential collaborators “allows it to happen more onthe nonprofit’s terms, which leads to a higher likelihood of success,”says Peter Kramer, manager of the Catalyst Fund.

In its 2013 Interim Report, the Catalyst Fund notes that much of itsearly success “can be attributed to its ability to provide a flexible modelin which nonprofits can charttheir own course with the freedomto choose their own consultantsand timetable…. Nonprofitpartners have not become overwhelmedwith final outcomesfrom the start but rather challengedto initiate the difficult discussions and work that lead to truepartnerships.” The Catalyst Fund intentionally avoids pushing amerger match. “There is a power dynamic you need to be very carefulabout,” explains Guedj of TBF. “We have seen funders trying toforce mergers … and it will work for a couple of years but fall apart.”(See “The Collaboration Alternative,” below.)

The Collaboration Alternative

Although our research focused on mergers andacquisitions, it’s clear that the majority of nonprofitorganizations are collaborating frequentlyin ways short of legally blending organizations.Of the 102 nonprofit leaders who responded tothe Bridgespan Group’s November 2010 surveyon approaches to managing through therecession, 81 percent said they were engagedin some form of collaboration, a jump of 20percentage points from answers to the samequestion in 2009. Says David La Piana, founderof La Piana Consulting, which advises mergersand collaborations, “While the energy is alwaysaround talking about mergers, the frequency isin every other kind of collaboration.”

Short of an actual merger, nonprofits canuse a range of alternatives to align with othersand achieve greater impact.

Best practice sharing: Advances sectorknowledge by promoting innovativeapproaches and sharing lessons learned(Lodestar Foundation CollaborationPrize).
Coalition: Aligns a group of like-mindedorganizations around a common, agreedupon goal (Green Economy Coalition)
Formal partnership: Allows two or moreorganizations to be committed to sharedgoals without integrating organizationalfunctions (Hillside affiliates).
Joint venture: Integrates partnershipof two or more organizations in a newlegal entity, owned by the partners(Career Family Opportunity Cambridge,a venture of Crittenton Women’s Unionand Cambridge Housing Authority).
Sharing services: Enhances economiesof scale, generally for cost savings, revenuesharing, or service enhancement(AARP and Experience Corps, whichshare office space, member outreach,and cobranding).

Each alternative carries tradeoffs in autonomy,risk, and investment required. Forexample, coalitions can spend vast amountsof energy just keeping members aligned, andthey can be slow to achieve deep, meaningfulimpact. Partnerships can be strengthenedthrough formal memos of understanding andprocesses, but without integration, there isno guarantee the relationship will continue.Shared services are likely to require significantlegal and operational alignment, meaningcost, revenue, and other benefits may notmaterialize in the short term.

When planning collaborations, organizationsneed to consider the pros and cons ofeach structure. Ultimately, the right approachdepends on the goals of the collaboration andthe parties involved.

Another model of funder support for mergers and collaborations isthe Patterson Foundation. “We rarely ever use the merger word,” saysPatterson’s president and CEO Debra Jacobs. “It scares people away.Mergers are often not the answer to the question.” What the foundationdoes offer is skilled third-party facilitation, when the time is right.“We let relationships bubble up, encourage organizations to sit downwith others and talk,” says Jacobs. “They’re not ready for a facilitatorif they just met for coffee once. They need to build trust first.”

And when the time comes to talk merger, The Patterson Foundationhas clear-cut ground rules for its involvement. Says Jacobs, “It can’tjust be two EDs, or two board members. If they’re going to enter intomerger exploration, we require that their boards approve a resolution.”

The Catalyst Fund and the Patterson Foundation are part of anincreasingly supportive ecosystem for nonprofit mergers and otherforms of collaboration. They can play a role in overcoming the hardbarriers that limit merger skill. But they can also address the softertraps around will to merge, by serving as trusted advisors on boardgovernance, senior staff role definition, and brand stewardship.

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Read more stories by Maria Orozco, Cristina Botero & Katie Smith Milway.