Guest Star Blogger Bill Strathmann: Why aren’t we merging more?

Below is the second in an occasional series of guest-star blogs from smart people with something interesting to say.  Bill Strathmann is CEO of Network for Good and he believes your nonprofit should have an urge to merge—and that your funders should be putting up the cash to make it happen. 

This month was busy for corporate mergers and acquisitions and in fact 2006 is matching the level of acquisitions of the dot-boom late nineties.  I don’t know whether this is true in the nonprofit sector (anyone have data on this?), but with 120 new nonprofits every day, lord knows we need more nonprofit mergers.

Before taking on the CEO role here at Network for Good, I used to be a management consultant with Andersen and my specialty (in addition to nonprofits) was something called PMI – post merger integration.  I was responsible for helping large and mid-sized companies deliver on the synergy promises that their CEOs made to the street during the courtship phase of the deal.  Now, having been at Network for Good close to 3 years and having done close to 3 mergers (DirectHelp in 2004, Groundspring in 2005, and What Goes Around in 2006– not technically a merger), I see many of the merger benefits that exist in the for profit sector, but unique nonprofit barriers to getting them done.

Everyone knows that most corporate mergers fail; about 2/3 of them.  The reasons they typically fail is that deals are done for financial reasons, but the first two letters of merger are Me.  They fail for “people” or cultural reasons.  I think that the corporate merger failure phenomenon is directly related to the reason there are not more nonprofit mergers.

Long-term, the financial reasons for doing a deal are either increased revenues or decreased expenses.  For publicly traded companies this results in an increased earnings per share (EPS) and stock price.  Corporations estimate the increase in margin and set their purchase price based on those projections and their expected impact on EPS.

Two things are lost in translation when you consider mergers in our sector.

1) Nonprofits don’t have a metric like EPS.  While we can measure reduced expenses it is difficult to objectively point to increased value.
2) Increased stock prices enable corporations to buy out executives with attractive financial packages that make for a pretty sweet consolation prize that goes to those who end up in the “headcount savings” category.  There is no consolation prize for those people in the nonprofit sector.

While the first point is key, I think the second point is the primary reason nonprofit mergers are so rare.  If two nonprofits consider a merger it is seldom for revenue reasons – yes there are occasions were there is a good earned income story or the blend of funders is so different that there is a good contributed income story.  For the most part, though, nonprofits come together because they can increase their social impact with a reduced cost base.  How do they reduce their cost base?  Last time I checked most nonprofits are more like the professional services industry than any other.  In other words, people (staff) provide the services and people (salaries and benefits) account for the majority of their expenses.  So the majority of savings in a nonprofit merger will typically be “headcount savings.”

And guess what?  There is no consolation prize.  The losers are just losers.

This applies not only to the nonprofit employees but to the nonprofit board as well.  And while the board members don’t lose their job they often lose an organization that is very near and dear.

So if the executive directors and board members are making the decision to merge or not to merge, then altruism is the only principle driving nonprofit mergers.  That’s clearly not enough.

Funders talk about the need for consolidation in the nonprofit sector all the time.  They are consistently challenged with multiple grant applications all addressing nuances of similar social problems and not enough money to fund them all.  “Collaborate!” they beg.

If nonprofit executives are going to merge, there needs to be capital available that provides incentives to counterweight the disincentives of job loss.  Major donors need to put their money where their mouth is.  Without financial incentives mergers will remain a corporate phenomenon that never fully translates to the nonprofit sector.