Opinion

The urge (not) to merge

Finance | Karl Wilding | 29 Oct 2009

Charities and electoral law Charities and non-profits do not seem keen on merging, says Karl Wilding.

It's often said we have little in common with the US. But new research from the Charity Commission suggests not only do we share a common language, but our non-profit organisations share a similar dislike of merging. In an age where non-profits are urged to merge on what seems a daily basis, are mergers the non-profit sector’s own dog that didn’t bark?

The US-wide Nonprofit Finance Fund recently found that only 5 per cent of almost 1,000 organisations had merged or considered merging, despite claims in the same article that many non-profit managers are ‘intrigued’ by the thought of merger. In a recent Chronicle of Philanthropy article, Professor Paul C. Light observed that non-profit groups have tended to shrink the size of their programmes and number of staff rather than merge. This is despite his expectation that as many as 100,000 groups might sink in a serious downturn.

This low level of interest is echoed by the Charity Commission’s third Economic Survey of Charities, which found that only 9 per cent of charities have considered merging, collaborating or forming a consortium with another charity.

Statistics on mergers in the voluntary sector are difficult to come by. In 2003, Charity Commission research estimated 9,000 charities were the result of mergers over the previous decade, but this hasn’t been updated. As in the US study, a greater number – 11,000 – had considered merger but gone no further. What is clear 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 increase in mergers accompanied what for the sector might turn outto be a long and difficult period of retrenchment? The financial costs of investigating merger are frequently cited. These are undoubtedly a 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. Lodestar has certainly been proactive, but ultimately it can only get so far: its CEO, Lois Savage observed that “we are seeing increased requests for grants to support mergers but not in the numbers we expected”. In the UK, the Office of the Third Sector recently launched the £16.5m Modernisation Fund, offering grants of up to £10,000 for organisations wishing to collaborate or merge. This could fund a lot of mergers, assuming costs are the main barrier.Costs may well be just the beginning: in fact, a scan of non-profit literature and trade press cites reasons ranging from culture mismatches, distraction from 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 senior management. Extreme maybe, but Peter Goldberg, the architect of a number of non-profit mergers, 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 is that a lack of intermediaries, equivalent to the M&A teams in investment banks, means that nobody is actively looking out for mergers that might produce synergies between organisations. In a report on non-profit merger and acquisition, the Bridgespan Group argues that foundations should take on a greater role as matchmaker, actively looking for merger opportunities between those they fund. Lois Savage in turn observes 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 is that shareholder value is destroyed rather than created, maybe the problem isn’t so much that non-profits aren’t merging, but that our expectations of why, when and how much non-profits should merge are wrong. This might in turn imply that merging as a strategic response to a crisis is unlikely to lead to better outcomes for beneficiaries. As Jo DeBolt, a non-profit management consultant specialising in mergers, observed recently: “Ultimately, the measure of success in a non-profit merger is not whether the organisation 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.”

Tweet

Directory: National Council of Voluntary Organisations (NCVO)
Who's Who: Karl Wilding