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Evaluating an M&A strategy to expand impact and enhance outcomes

RFP
Mergers, affiliations and collaborations in the not-for-profit sector
Leaders of not-for-profit organizations and their boards are growing increasingly comfortable with furthering mission objectives by partnering with others. Whether these partners are for-profit companies, donors, governmental agencies or fellow nonprofits, few will challenge the popular sentiment that “together, we can do more.” While organizational objectives can be achieved by establishing one-off partnerships and informal collaborations, some not-for-profits have elected to expand impact by formalizing relationships via an M&A strategy. Successful organizations looking to do more, as well as struggling organizations aspiring to financial stability, have explored M&A to maintain financial viability, add depth and breadth to offerings, enhance reputation and brand, and reposition themselves for long-term success.

Besides analyzing the possible benefits associated with joining forces, preparing for such a major endeavor — evaluating the alignment of objectives, communicating with stakeholders and prudently performing due diligence — has proven critical in attaining eventual success.

Positioning for the future
In the for-profit sector, many organizations will conduct scans of their markets and competitive space to identify companies with high potential to add strategic value to their portfolios and performance. This approach could gain equally strong footing within the not-for-profit sector.

In an era when top-line pressure and escalating costs are creating a challenging operating environment for entities of all sizes, larger players generally have greater scale and ability to successfully navigate such conditions. Operating from a position of relative strength and stability, larger organizations can typically make a compelling case to their smaller, more resource-constrained peers that a combined entity will better position both organizations for the highest probability of success and maximal societal outcomes. Some recent examples of such partnerships include:
  • The merger of Florida Blood Services, Florida’s Blood Centers Inc. and Community Blood Centers of Florida (2012)
  • The merger of Jewish Guild Healthcare and Lighthouse International (2013)
  • The merger of Combined Jewish Philanthropies and Jewish Federation of the North Shore (2013)

Mutual gain from collaboration
It is important to recognize that exploring alternate operating models should not be viewed as excessively imperial (for those operating from a position of strength) nor a sign of defeat (for those struggling), but rather as a proactive and strategic assessment intended to help an organization better fulfill its mission. Organizations are typically drawn to an affiliation or partnership because of one or more anticipated benefits:

  • Improved ability and capacity to serve existing constituents
  • Opportunities to expand delivery of existing programs and/or services to new geographies
  • Ability to offer new programs or services
  • Reduced costs and efficiencies across administrative functions
  • Access to financial support and resources to improve financial position (debt coverage, financial ratings or ratios, etc.), enhance facilities, upgrade technology infrastructure and systems, and fortify market outreach

Large organizations tend to be driven to explore such collaborations for a variety of reasons. Attempting organic program development is usually a riskier, slower, more costly and time-consuming growth strategy. Integrating operations with an established organization with a strong track record enables the larger player to diversify its operations, acquire strategic assets, and expand its reach in a fairly turnkey manner. As opposed to building from the ground up, collaborations enable organizations to readily acquire the expertise, infrastructure and credibility of a fully functioning program.

Key considerations in exploring compatibility
No matter why an organization is interested in exploring a partnership with another entity, it is important to consider the significant level of effort required to implement such a collaboration. These initiatives demand a tremendous amount of time, energy and commitment. Inherent activities include exploring the alignment of mission objectives, outlining the principal objectives of the partnership, assessing anticipated synergies, considering constituent feedback and receptivity, developing financial projections, drafting legal documents, and receiving the requisite approval, if required, from various accrediting or regulatory bodies.

  1. Discuss what’s best for the mission.
    What is distinct about collaborations in the not-for-profit sector is the focus on maximizing the attainment of mission objectives. As compared to M&A activity in the for-profit space — where the principal focus is typically on maximizing stakeholder value — not-for-profit boards and management must consider how to position their organization for mission, versus strictly financial, success in the future.

    While preserving tradition is often a key priority for any board or organization, it is important that a well-intentioned appreciation for the past does not impair leadership’s ability to look to the future.

    Leaders who have implemented successful collaborations have paid careful attention to the sensitivities inherent in combining organizations, and have found ways to establish agreement on new or revised organizational objectives. It is essential to perform a very thorough analysis of potential impacts to mission, stakeholders and finances, and to clearly articulate the vital importance and key advantages of a new direction going forward.

  2. Communicate with stakeholders: Listen and inform.
    When exploring such ventures, it is critically important to solicit input from a variety of stakeholders. These individuals could vary from organization to organization, and typically include those who consume your programs/services, funders, employees, donors, government leaders, and the local community. Identifying the various constituent groups that may be affected by or have opinions about an endeavor is an important first step to effectively informing and engaging the community.

    Any time a collaboration, affiliation or merger is announced — even at the earliest stages of exploration — constituents will have opinions and concerns about the likelihood of success, anticipated benefits, risks, organizational motives and potential drawbacks. Open and transparent communication is critical while leading an organization through a period of transition. There are numerous examples of merger attempts that stalled due to stakeholder pushback; understanding constituent views and navigating this process with thoughtfulness and sensitivity are key to developing and executing an appropriate strategy.

  3. Be realistic in estimating anticipated benefits.
    In exploring a potential collaboration, it is easy (and natural) for those individuals most in favor of the affiliation to think about the many benefits that could result. As in the for-profit sector, nonprofit collaborations typically do not yield the full range or extent of benefits originally anticipated and outlined in the due diligence process. Those who are eager or enthusiastic about the prospects of such relationships are quick to evaluate possible outcomes and performance with an overly rosy view. Financial and nonfinancial benefits and costs should be evaluated with a critical eye and from an expected-value standpoint, with appropriate sensitivity analyses performed to foster an understanding of risks in potential outcomes. Cost savings, synergies and efficiencies frequently take much longer to materialize than expected.

Although many believe that M&A strategies are employed exclusively by profit-seeking, shareholder value-oriented for-profit companies, such partnerships and collaborations offer tremendous potential within the not-for-profit sector. M&A can help nonprofits further the pursuit of mission objectives, expand reach, achieve scale, generate efficiencies and enhance social impact. With varying objectives for pursuing these endeavors and many lessons learned over the years, boards and organizational leaders should remain open-minded about the prospect of collaborations as a means to better position their organizations for the future in order to achieve ongoing success. Finding the right partner, engaging constituents in the process and performing well-grounded due diligence are key to a smooth and effective transition.

See the full report: The State of the Not-for-Profit Sector in 2015