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Children's Voice Article, March/April, 2004

Mergers and Acquisitions in Nonprofit Agencies

By William Atkinson

For three years, Alex Morales, President and CEO of the Children's Bureau of Southern California in Los Angeles, has been exploring opportunities for mergers and acquisitions. "We haven't found anything yet," he reports.

Morales's observation is that, in the nonprofit world, the factors that motivate mergers and acquisitions are more rare than in the for-profit world. Three years ago, Children's Bureau's board authorized Morales to explore merger and acquisition options. Despite the agency's interest, it still hasn't identified any viable opportunities.

"Most organizations that are interested in mergers or acquisitions are those that may be driven by desperation [for] their survival," Morales explains. "The problem is that you end up dealing with organizations that are in weakened conditions." Strong organizations rarely want to consider the option.

"The biggest hurdle begins and ends at the executive director level," he says. For-profits tend to be driven by their boards and their for-profit interests. But, according to Morales, the driving force for nonprofits is the personal concern of executive directors over their own futures.

"The first question posed by executive directors is not, 'What will this do for our organization?' but rather, 'What will this do to my career?' In most cases, they don't want to have to consider the options of retiring, stepping down a position, or leaving the organization."

Even in the few instances when Morales has found a strong organization with an executive director who was willing to consider a merger, the organizations' cultures were so different that such a move would have been too difficult. "I heard a presentation from one executive who was involved in three or four mergers, and two of them ended up fracturing after a short time," he says.

When Mergers are Successful

Despite the challenges Children's Bureau is facing, many agencies have succeeded in working through mergers and acquisitions, and the results have made the efforts worthwhile.

Five years ago, a small agency called the Parent Connection approached Arizona's Children Association (ACA). That merger "added primary prevention services to our agency, which we didn't have at the time," explains ACA Senior Vice President and Chief Operating Officer Dee Ann Barber.

ACA Board Chair Nancy Stanley recalls the Parent Connection merger. "I was a board member of the Parent Connection at the time. We were a primary prevention parent education organization in Tucson and were having problems staying afloat as third-party funding was drying up." Although it served thousands of children, ACA didn't have a strong prevention component--its efforts were focused primarily on early intervention.

As a small agency with an annual budget of less than $500,000, Parent Connection was concerned about coming into ACA, with its $25 million annual budget. Would its identity become muddied? Would philosophical differences with ACA impair its mission? What would happen to the intimate, family environment among its employees? "We were fortunate in that ACA didn't gobble us up," Stanley recalls. "Rather, they celebrated our mission."

ACA continues this philosophy today as it considers new merger opportunities. "We look for agencies with strong profiles and well-defined missions," Barber explains. "We have a strong interest in allowing them to continue to operate fairly autonomously." They keep their names, their staffs, and their buildings. "They're well-known in their communities, and they're also known by those names by individuals and groups that donate to them," Barber explains. Structurally, they're identified as divisions of ACA rather than as separate programs. "Their senior managers participate as equals on our management team with our other managers."

More recently, ACA has begun a merger with Las Familias, a small, struggling treatment agency for sexually abused children, and has been contacted by Golden Gate Community Center in Phoenix, which also seems like it might be a good match. "We're exploring the opportunities here," Barber says.

Merging agencies that are already part of the same broader organization may seem easier than merging completely separate entities, but this isn't always the case. Culture, more than structural organization, is often the larger challenge. "When New York began to cut spending on child and family services, we decided we needed to consider a merger," says Liz Giordano, CEO of mercyFirst (formerly Angel Guardian - St. Mary's Children and Family Services) in Syosset, New York. The agency is the result of a merger between two formerly separate agencies--Angel Guardian, a five-borough, New York City agency based predominantly in Brooklyn, and St. Mary's, located in the suburbs of Long Island. Both were operated by the Sisters of Mercy.

"When we conducted a feasibility study, we found both agencies had a tremendous amount of synergy," Giordano says. They even shared some board members. Both had the same philosophy and mission, created by the Sisters of Mercy more than 100 years earlier.

The agencies conducted due diligence, which included a marketplace assessment of the government revenue stream. They also created a project team for the merger, comprising board members, executives, and front-line managers, to make sure both organizations could blend. "If you don't address this on the front end, you'll have to spend the next two years trying to solve problems," she explains.

When Angel Guardian and St. Mary's merged, the result was 29 sites extending over 100 miles. The most significant question for the boards was whether to structure the new organization regionally or functionally. "We could have developed a regional plan based on geography," Giordano explains. "We elected not to do this, because we were afraid the two cultures would never join. We didn't want [them] operating in isolation."

Instead, the combined agency organized around programs. For example, the agency has 12 group homes from the furthest point on Long Island to Brooklyn. Rather than organize the homes geographically, the agency created a position called Senior Vice President for Group Homes. "We did the same with our foster boarding home program," she says.

Child and Family Services (CFS) of New Hamp-shire in Manchester is another agency with success in mergers. "We've done three mergers in the last eight years and talked to 15 or 20 more agencies where things didn't work out," says President and CEO Mike Ostrowski. Most of the agencies that did successfully merge with CFS were small community stand-alones, with one or two program functions.

"The two major precipitators," Ostrowski explains, "have been economic crisis, where agencies were going down for the third time, or changes of leadership combined with economic crisis." In such situations, boards often conclude they would be better off as part of a larger organization.

Planning and Preparation

What does it take to effect a successful merger or acquisition? Executives who have been involved in them offer several recommendations.

The first step is to look into the future and approach the concept of merger or acquisition in a planned way. "Decide if you want to be an acquiring agency or an acquired agency," says David Emenhiser, CEO of ECI Organizational & Fund Development, a Los Angeles - based consulting firm. "Next, look for agencies that are similar enough to you. Some agencies have merged with hospitals or mental health centers and quickly realized their missions were just too far afield for things to work out."

"It's important for people to get together and talk early," Stanley adds. "It doesn't work if you allow the other agency's executive director to learn about your agency and interpret it to everyone else at the other agency." Agencies exploring a merger have to bring their staffs and board members together face-to-face so everyone gets a sense for what the merger would be like.

For example, it's often difficult for board members from a small agency to become comfortable with being board members for a large one. "In my own case," Stanley recalls, "it was difficult to shift from preparing food for the Halloween party at Parent Connection to dealing with purely governance issues at Arizona's Children Association."

Barber says, "One of the most important things we have learned is the importance of a due diligence process." Both organizations need to unearth all information that is pertinent to both parties--including programs, liabilitiy and risk management issues, finances, and more--and it all needs to be above the table.

"In our case, staff in both organizations gather the information and present it to a special board committee composed of some of our board members as well as some from the other agency," Barber says. This committee oversees the due diligence process. Because ACA has been through mergers so many times, it now has a template and format for due diligence. "The results of this tell us whether the merger should take place."

"Our first question is, 'Will the clients and community be better off if this merger takes place?'" Ostrowski says. "If not, it's probably not a good idea."

Next, the agencies must make sure their services fit well together. "An ideal arrangement," Ostrowski continues, "is for the other agency to be able to extend a service that you don't offer yet, but that would flesh out an existing array of services you do have." Or can one agency add some geographic coverage the other doesn't have?

"Review the organizational goals of both agencies, and make sure they can be merged," Giordano suggests. Once the merger is in place, you need a unified strategic plan for the future--ideally for the next three years.

"Nonprofits are often created by a small number of passionate people who want to serve their communities," Ostrowski points out. "They're very proud of their own traditions, their name, and their own way of doing things. As such, you need to talk all this through during negotiations."

"You also need legal review of the bylaws of both organizations," Barber adds. Attorneys need to draft the merging documents on which the merging boards vote.

Board Issues
Another question to ask is what the new board will look like. Some agencies combine boards, others may select a limited number of members from each of the original individual boards, and still others may take a different approach. Regardless of how you structure your new board, you still need to select a chair and create a new committee structure.

If the new board is too large, some merged agencies implement a policy in which, as board terms end, they don't refill those seats until the board gets down to an ideal size. In some cases, board members leave voluntarily after a merger. "They're exhausted and feel they have done their part in delivering their child into good hands," Ostrowski explains.

With Las Familias's merger with ACA, Barber explains that ACA's board "created a number of slots for their board members, and it's up to them to determine who their board members will be. The rest of the board will remain an advisory board and focus on fundraising, which is something they were always successful at."

Exploring a merger with Golden Gate in Phoenix, ACA knew it wanted a presence in that city, so it offered to invite as many Golden Gate board members as that agency wished to become part of ACA's board. "I think most of them will accept the invitation," Barber says.

Executive and Staff Issues
In some mergers, the CEO of one merging partner may become a vice president in the merged organization, making him or her answerable to the CEO of the other merging partner. In other cases, one CEO may be forced out altogether. In either event, Emenhiser warns, "You have to take executive egos into account, even though everyone denies this is an issue. You also have to take executive pay, responsibility, and benefit differentials into account."

Staff integration is also important. Some staff may have started working for a small agency because they liked the size. "These people may not want to become part of a larger organization, or may not even be able to fit into it well," Emenhiser explains.

"Staff may start leaving, not sure of what changes the merger will bring," Ostrowski adds. "If you don't get them involved, you can lose a lot of talent before the merger is even completed."

Costs
What will it cost to bring the two organizations together? Capturing the activities and costs associated with the merger is vitally important.

"Get a good sense of the cost of mergers," Stanley emphasizes. "They're expensive. These costs were a surprise to us at first." You don't want to get halfway down the line, for example, and realize the cost of harmonizing employee benefits and salary structure will kill the merger.

"We didn't realize how expensive merging was," Giordano admits. "For example, the consultants we used were very expensive. In addition, it takes two to three years following a merger until you begin to benefit from any economies of scale."

Some agencies look at mergers as a way to save money, especially on administration. Some cost savings may result, according to Barber, but they're not that much. She advises against considering a merger or acquisition if the primary goal is cost savings. "It won't happen."

And Emenhiser warns, "If you do go ahead with [a merger], it will take a lot of time and be very distracting from your current core mission…These initiatives suck up about 60% of the executive's time."

There are ways to make the cost pill easier to swallow. "Our CEO went to a number of funding agencies to ask for money to assist in the cost of mergers," Stanley says. "He emphasized how these [funders] were always seeking efficiencies and complaining about duplication of effort in communities."

Explore the Benefits
Despite the costs, mergers offer many benefits. For smaller agencies absorbed into larger agencies, the primary benefit is the opportunity to stay afloat. "In addition, Ostrowski notes, "smaller agencies find larger ones attractive because they [gain] access to resources they wouldn't otherwise have, such as staff expertise."

Larger agencies can also benefit by bringing in smaller ones. "For example, we're getting more involved in intergenerational programs, particularly for caregivers such as grandparents," Barber says. Golden Gate, given its geographic area, has large numbers of grandparents caring for grandchildren. They also have a component for senior health. "What we can bring is a more coordinated effort to pull together the services of Golden Gate as well as adding some of our own to serve this population."

Spread the Word
In the nonprofit sector, mergers and acquisitions can't occur in a vacuum. Clients, donors, and the community as a whole need to know what is taking place, why, and how it will benefit everyone.

First, craft the message you want to send, such as improving services to the community and adding new ones. "Never talk about it as an acquisition," Ostrowski emphasizes. "Focus on calling it a 'new partnership for the benefit of the community.' Nothing good comes from one CEO crowing about taking over another organization."

Give talks at local community organizations, and ask board members to be available for interviews with the media.

Involve your marketing and public affairs department in the merger so they can publicize the situation to the community, especially to clients and funding organizations and individuals. "We've received a lot of publicity via the local media for our most recent merger with Golden Gate," Barber reports. "We also have an open house [to] inform the clients of what is taking place and give them information on additional services that will be available as a result of the merger."

Be sure to create a structure to maintain supporters of the new agency. "You don't want the other agency to become part of your organization, only to have their long-term supporters walk away and no longer provide funding," Stanley explains. Look for meaningful ways to involve these people in the new organization.

Integrating

Once the merger is complete, the new board should consider a combined retreat to get to know each other and use the opportunity to update the planning process, Ostrowski advises.

Take some time to observe the new merged agency and see how it operates before making further changes. It's destructive to everyone to begin making changes right away. "A small agency came to us, and it had some funds in reserve," Stanley recalls. "We allowed them to continue using those funds for their own operations, rather than having to combine them with ours, until things settled out and we could see how we would grow together." This went a long way toward making the smaller agency feel comfortable, she says. "They weren't worried we would come in, grab their assets, and leave them a shell of what they were."

Although the acquiring agency may not want to raid the assets of a newly acquired organization, it should take steps to merge the cultures and staffs. "After a merger, the board needs to make sure integration of the work culture takes place," Emenhiser says. He recalls visiting a Detroit agency where a merger took place 16 years ago. "The staffs are still eating lunch separately."

Giordano offers a recommendation to facilitate the merging of cultures: "To move forward as smoothly as possible after the merger, identify and focus on your common ground. Work from there. When everyone realizes they are both working toward the same goal, they become less protective, and synergy begins to develop."

Still, regardless of how much you try to prepare everyone, change is difficult. Agency leaders have to create a support structure that will exist after the merger to help people work through the change. "I even continue to wrestle with the changes myself every day," Giordano admits.

William Atkinson is a full-time business writer and former regional reporter for TIME.


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