In strategic mergers, organizations consciously choose to acquire certain nonprofits which add a specific type of value to their mission, program portfolio, and/or economies of scale. Rather than raise all the capital, grow the competencies, and build the capability to add new programs themselves which can take a long time (and may be virtually impossible in this market), organizations are seeking to partner or even merge with organizations that have the specific skill set, the proper government contracts, and appropriate licensing to go support their services. This can be done in a shorter timeframe with a merger.
I have been particularly taken with one example of a strategic merger model that Bridgespan wrote about in their wonderful piece of research: M&A: Not Just A Tool for Hard Times, published in February, 2009. The Arizona Children’s Association (AzCa) was highlighted as an example of a strategic merger in the Bridgespan article. AzCa grew from $4.5M annual budget in 1999, to a $40M annual budget through six strategic mergers. But AzCa’s merger strategy was not driven by finances; instead it grew out their desire to expand services to the youth and families they were serving.
I was curious how the rest of the mergers proceeded, so I called Fred Chaffee, the Pres/CEO of AzCa to ask him more:
Mission + Strategy: Could you list the chronological order of the mergers you did?
Fred Chaffee: The first one was in 1999, in Tucson, called Parent Connection. It works with evidence-based family life education, children 0-6 years of age. Their budget at the time was between $300 -$ 400,000.
Our second merger was in 2000, Child Haven, based in Prescott, Arizona, a child crisis center. We helped start this agency about 8 years before; their budget was $200,000 when we merged.
Our third merger in 2002 was with Las Familias, in Tucson, with a budget of $1.5M. Their mission was to provide services for victims of sexual abuse, both children and adults who had been victimized as children.
Our fourth merger was in 2004, with Golden Gate Community Center in Phoenix with a budget of $1.8M. It is a 70-year old settlement house in a working class Hispanic neighborhood. It is a great community center.
Our fifth merger was in 2006, with New Directions Institute for Infant Brain Development, with a budget of $600,000. New Directions translates the neuro science of brain development into a curriculum to train people to deliver.
Our sixth merger was in 2008, the Southern Arizona Center Against Sexual Assault, with a budget of $2M. This organization focuses on the prevention of violence against women. .
Mission + Strategy: Fred, all of these merger transactions and integrations must have cost a lot of money. How did you finance them?
Fred Chaffee: We have a template for the expenses; depending on the size and intricacies of each merger, we can estimate accurately what each one will cost. We make a business argument to donors about why this merger will improve service outcomes and every one of the mergers has been completely funded as a result of the arguments we have made.
Mission + Strategy: When I look at your web site, I see the original logos of the acquired nonprofits and in some ways, this feels reminds me a parent corporations. Did you intend to strike a very different kind of relationship with the acquired organizations?
Fred Chaffee: Yes, I see what you mean but let me be clear: these are each acquisitions. Each 501(c)3 is dissolved; the executive director is now the Divisional Director of their nonprofit; we register AzCa as doing business for each organization in each county of the state, and the individual Boards are also dissolved and instead two to four board seats are offered to each nonprofit. Each of the original nonprofits has become a division of our organization, and each division is part of a regional branch of our organization. Each organization is doing what they were doing prior to the merger, but to a larger constituency and in many instances to a whole bigger audience and parts of the state.
Mission + Strategy: You have done so many mergers; do you intend to keep doing them? Also, how long does it take you to do one merger?
Fred Chaffee: The average length of time for the transaction is between 3 months to 1 year. The Integration usually takes between six to eight months for the up-front systems and then the cultural integration takes another six to eight months. We plan to indefinitely keep doing them, but not growth for growth’s sake. We have walked away from opportunities that were terrific from a program perspective but too upside down in terms of debt.
Mission + Strategy: What have you learned over the course of doing these mergers?
Fred Chaffee: These kinds of processes are journeys and journeys can take a lot or a little time. You need to agree with the other agency to take a journey together and recognize that even when you go into due diligence you may find that we are not a fit and that’s O.K., and to relax about that.
Be really cognizant of communication. Make sure that they heard is what you meant, and you heard what they meant, too. Agencies are concerned about brand, including mission, governance, and agency leadership, and you need to pay attention to all of those all of the time, particularly if it’s a smaller agency getting acquired by a larger agency. If the merger’s important, make sure to let the Executive Director know there is a place for him or her in the organization.
Mission + Strategy: Would you recommend a strategy of acquiring nonprofits for organizations that wish to grow?
Fred Chaffee: It makes a lot of sense, particularly when you don’t have the expertise in house. But also, the acquisitions each brought a new vitality from community-based boards to our Board; they brought other visions and enhanced the AzCa Board enormously. This was a byproduct we didn’t anticipate but it’s been very important to us. Our board is so much stronger now as a result of having integrated these Board members.