Nonprofit Mergers that Work

In 2013, United Cerebral Palsy (UCP), a $9 million nonprofit, joined with Seguin Services, a $27 million operation, creating UCP Seguin Chicago. Looking back, it’s clear that the move was a good one; the combined organization has grown substantively, and it is much more effective and efficient that either pre-merger entity was on its own. Why should that fact be of particular interest? Because as a sector, we still don’t know much about nonprofit mergers. Even the idea of two nonprofits merging still seems alien—or worse—to many people in the field. As author and nonprofit consultant Thomas McLaughlin caustically observed in his book Nonprofit Mergers and Alliances, “To some in the nonprofit field, the idea of mergers is scandalous and distasteful.”

Yet nonprofit mergers hold great promise, as our recent investigation, the “Metropolitan Chicago Nonprofit Merger Research Study” found. Nonprofit organizations can and should consider using mergers as an effective tool to achieve their goals, advance their mission, and increase their impact.

Our study, a partnership between Northwestern University’s Kellogg School of Management, Mission and Strategy Consulting, and eight Chicago foundations, analyzed 25 nonprofit mergers that occurred in the Chicago area between 2004 and 2014. In doing so, we tried to build on earlier research, including the one existing large-scale study of nonprofit mergers, conducted in 2012 by the Minneapolis-based Map for Nonprofits. But we also sought to break new ground. Specifically, we presented qualitative analysis of nonprofit mergers using two primary methods: interviews of representatives of the 25 selected mergers taken from a sample of 60 that fit our study criteria, and in-depth studies of five of those 25 cases. We interviewed a minimum of three central players from each merger—acquired and acquirer—encouraging participants to share what they had learned from the merger experience. We selected different types of mergers among our cases to illustrate how the merger tool could be adapted to meet the particular needs of the merging parties. And finally, unlike prior studies, we also examined uncompleted and dissolved mergers, to better understand why some fail to materialize and others fail after the merger occurs.

The Findings

To our minds, our most important finding was that in 88 percent of the cases we studied, both acquired and the acquiring nonprofits reported that their organization was better off after the merger, with “better” being defined in terms of achieving organizational goals and increasing collective impact. To be sure, we uncovered buyer’s remorse and founder regret among merger participants. In the vast majority of cases, however, the participants reported that the merger resulted in increased impact—the critical measure of merger success.

Our other findings included the following:

• In 80 percent of our cases, a prior collaboration existed between the merging organizations;
• In 80 percent of the cases, the merging parties engaged a third party consultant or facilitator;
• In 85 percent of the cases, the board chair or a board member from one of the organizations emerged as the chief merger advocate;
• In 60 percent of the cases, the acquired organization initiated the merger discussion.

What Drives Success

Merger studies in the for-profit world tend to validate merger success through reference to balance sheets, cash flows and financials. However, we found that while greater financial health is critical for successful mergers, a financial perspective alone often misses a key understanding of how organizations respond to markets, particularly in the nonprofit arena, and how markets can affect merger success.

Our 25 merger cases spanned more than a dozen traditional nonprofit subsectors—foster care, disabilities, adoption, job training, literacy, hospice care and more whose boundaries spanned neighborhoods, city to state and, in case of federations, were multi-state in scope. Each of these industries and markets was distinctive. So for each merger in our study, we considered the subfield (industry), the market forces, and the public policies (actions by government authority).

To mention just a few of our case examples and the reasons that drove their mergers:

By pooling their resources, three geographically contiguous hospice providers—JourneyCare, Midwest, and Horizon—enabled the merged entity, also called JourneyCare, to expand its collective customer impact and to gain a competitive advantage in an industry where for-profit providers had become significant players. The Affordable Care Act (ACA) of 2010, which completely transformed the health care field, was the primary driver for this merger—the largest (an $80 million combination) in our sample.

Another classic case of organizations combining to leverage their resources involved Big Brothers Big Sisters of Metro Chicago. This effort, which involved three geographic mergers of youth mentoring organizations across Northern Illinois and Indiana, turned a largely insolvent operation serving 100 or so at-risk children in 2005, into a $ 4 million sustainable enterprise promoting high quality services for 1800 at-risk children in 2015.

In a rare case of a foundation merger, the Eleanor Foundation merged into the Chicago Foundation for Women (CFW) in 2012 to better achieve a mutually held mission to help female-headed households reach the middle class. Four years later, the new CFW had doubled its asset size, increased its donor base, and vastly expanded its projects.

Meanwhile, on a smaller scale, Boundless Reader, a small, school-based literacy program in Chicago, merged with a larger volunteer-driven tutoring program, Working in Schools (WITS). Boundless Reader consisted of highly successful teaching program that was fully integrated into WITS literacy training programs through the merger, to benefit more Chicago Public School children.

Our study encountered many “expedient mergers,” driven by succession and financial rescue, but we uncovered several well-planned and strategically anchored mergers that produced greater growth and more services. From an external industry and market perspective, success turned on the ability of these organizations to understand each other’s competencies and figure out how combining those competencies would enhance their competitive position. The UCP Seguin merger, which we mentioned early on, is an exemplar in this regard.

UCP Seguin Chicago: A Long Courtship

The success of the UCP and Seguin merger is all the more remarkable (and worth going into some detail here), because the organization operates in Illinois—a state where chronic funding delays has forced other disability providers to shut their doors. It took a comprehensive, deliberate, and particularly thoughtful approach to make this merger succeed.

Perhaps most importantly, for other nonprofits considering mergers, it’s important to understand that UCP and Seguin knew each other from prior collaborations, and their courtship spanned five years. The merger process began when the UCP CEO announced his retirement. Rather than simply seeking a replacement, he and his board chair became convinced that greater mission and organization sustainability could be generated through a strategic merger.

UCP and Seguin operated separately for more than 60 years in the field of disability services, with offerings including residential housing, in-home services, foster care, consulting, and income-generating enterprises. They shared common values and a mission of service to the disabled. And both were financially healthy. However, these similarities notwithstanding, what united them were their differences. UCP promoted independence for children and adults through a multi-state enterprise called Infinitec: access to information, training, and equipment such as computers. Seguin Industries was a pioneer in integrated community living in group homes and through in-home support services. UCP had key industry advantages in technology, and Seguin had key advantages in facilities. Little or no overlap existed between their programs, services and fundraising. When UCP approached Sequin, it wasn’t difficult for leadership teams on both sides to see that by trading these core competencies through merger, they would be able to achieve greater organizational strength and industry growth.

While the complementary structure of these two organizations provided logic for the merger, the key to the merger success was trust. As the outgoing UCP Leader Paul Dulle told us: “Trust overcomes fear, which is the biggest impediment to change, and to a merger.” Trust building, in advance of the actual merger, occurred throughout the organization, starting with an exploratory committee comprised of key members from both boards. On another level, program heads and staff began a series of deliberate interactions so as to become familiar with one another’s programs. To remove “merger fear” from the onset, merger leaders assured staff that, should a merger occur, no one would lose their job, benefits, or current compensation. Trust built at all levels of the two organizations enabled the merger process to work. Integration of the two organizations began before the formal merger, and developed smoothly thereafter.

An Idea Worth Consideration

In some ways, it’s little wonder that mergers have so few champions within the nonprofit community. They are often associated with leadership failure, financial distress, and good intentions run amok. And experience tells us that nonprofit boards have difficulty discussing mergers. Whether they are unfamiliar with mergers as a restructuring tool or consider merger a last resort, boards generally do not think proactively about mergers or merging.

It’s time to take another look.

Read more stories by Donald Haider.