Nonprofit organizations seek strength in mergers

When representatives from some 75 nonprofits convene in Boston Tuesday, they'll tackle a subject that was seldom discussed 10 years ago because it smacked too much of corporate America.

The notion of mergers among nonprofit organizations "used to be an 'm-word' I didn't dare say in public," says Thomas McLaughlin, a management consultant to nonprofits at Grant Thornton in Boston.

But now consultants say mergers are shedding their stigma and becoming downright alluring for nonprofits across the country. Having seen internal consolidations succeed for such recognizable groups as the Girl Scouts and the American Lung Association, nonprofits of various shapes and sizes are testing the waters for possible mergers and are often taking the plunge.

"We have noticed a marked increase in both interest and activity" related to strategic mergers, says Bob Harrington, senior manager at La Piana Associates, in Emeryville, Calif., a management consulting firm with a nonprofit specialty. He says the number of inquiries from nonprofits eyeing a merger has increased 50 percent over the past two years.

Accelerating merger activity is tough to quantify since the Internal Revenue Service doesn't track mergers per se, according to Linda Lampkin, director of the Urban Institute's National Center for Charitable Statistics. But in tracking this universe of 1.3 million nonprofits, including some 80,000 to 90,000 new ones created each year, she concludes that mergers and collaborations are "much more common" than they were a decade ago.

Mergers are increasingly happening among regional organizations that stand to gain from new strategic positioning, Mr. Harrington says. In April, for instance, the debt-saddled Ulster Performing Arts Center (UPAC) in Kingston, N.Y., merged with Poughkeepsie's Bardavon Opera House, which needed the extra space afforded by the 1,500-seat UPAC facility.

Another example: In November, two of California's oldest child-welfare organizations - Hathaway Children and Family Services and The Sycamores - stopped competing for funding and merged to become the largest private mental-health and welfare agency in Los Angeles County.

Funders seem to be playing a key role in the merger mania. In a time of shrinking federal funding for human services and intense competition for grants of all types, Ms. Lampkin says, private and public benefactors alike are encouraging efficiencies and economies of scale.

But, she notes, bigger isn't always better or more efficient.

"Sometimes it's a forced collaboration [to appease benefactors] that causes more expenditure of funds," Lampkin explains. "Sometimes nonprofits feel it's more costly to collaborate because it takes more time to have meetings, and figure out who's going to do what, and to get over the rough spots when you don't have exactly the same ideas about how to do things. So it can be costly, the whole collaboration thing.... It's not easy."

Mergers are sometimes precipitated by necessity. UPAC, for instance, and its 150 members asked the Bardavon to absorb its $200,000 debt. Under the agreement, UPAC gets to keep its name, but the Bardavon in effect moved "to take it over - lock, stock, and barrel," according to Bardavon Executive Director Chris Silva, who now oversees the combined institutions.

"It's a mixed [situation] because people will always say, 'Why couldn't we make our place work?' " Mr. Silva says. But the deal enables Kingston to keep an arts hub alive in its economically depressed downtown. And it affords the 2,000-member Bardavon a wider reach, into a town 30 minutes away, with its mix of pop and classical events.

"By having all those extra seats [at the larger UPAC facility], not only can we attract bigger artists and bigger names and more people, but we can in theory make more money without charging more for the ticket," Silva says. And there's another benefit: "When we're closed here, which we are religiously for renovation, we don't have to be closed [altogether]. We've got another venue over there."

But today's mergers often involve two strong organizations that see synergies for the future, says Paul Clolery, editor of the New Jersey-based Nonprofit Times. For example: to meet rising demand near struggling industrial bases, such as Michigan's automotive industry, nonprofits are turning to mergers as a way to maximize their capacities to serve a growing clientele.

"Whenever you can consolidate services and do more by spending less, that's a good thing," Mr. Clolery says.

In Boston, the March merger of two locally well-known human service providers - Crittendon and The Women's Union - has helped galvanize interest in the June 6 event, titled "Nonprofit M&A: Why? What? How?" A panel of speakers, convened by Executive Minds for Social Innovation, will explore what mergers mean for organizations and which types of groups might benefit most.

Looking ahead, observers of the nonprofit sector expect consolidations to continue. Mr. McLaughlin predicts that nonprofits will gain steam as a societal force in coming decades, picking up responsibility for services formerly performed by government.

He suggests doing away with a popular understanding of the nonprofit world as "1,000 flowers" planted in order to see which ones would succeed enough to attract dollars and survive. That model of encouraging excess capacity, McLaughlin says, has given way to a leaner one that's here to stay.

"We are long past the arena of, 'let 1,000 flowers bloom,' " McLaughlin says. "We need [nonprofits to be] oak trees.... We know what works. In many areas, we have to scale up to achieve a manageable size and become industrial-strength organizations."

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