Charitable Mergers

Combining Inefficiently Small Nonprofits

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Charitable Mergers and Nonprofit Mergers: High profile New York attorney Martin Lipton, an expert in corporate mergers and acquisitions and also a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, finds that two many otherwise fine philanthropic organizations nonetheless have "overlapping objectives" and "spheres of operation." ("M&A: Not Just for the Corporate Set," The Wall Street Journal, February 28, 2012).

In the aggregate, therefore, such organizations suffer from inefficient redundancy and duplicative management overheads. A trend towards consolidation of the nonprofit sector, though necessary, would have a negative impact on job opportunities at nonprofits.

In a similar vein, Financial Times columnist Luke Johnson offered a thought-provoking perspective in his August 4, 2010, commentary ("Charity needs a touch of business"). His principal arguments:

  • Too many new charities are being founded.
  • Many existing ones, meanwhile, are short of money and adequately skilled staff.
  • Too many of both are inefficiently small.
  • Consolidation of the charitable sector would bring economies of scale and the ability to deliver better results.

This is both an opportunity for those with the requisite skills (including, especially, negotiating skills) to broker the mergers that Johnson advocates, and a threat to those who benefit from the status quo, such as highly paid nonprofit executives who thus would become redundant.

Meanwhile, one also should recognize that there are also downsides to large size, such as possibly losing touch with local needs and conditions. Thus, Johnson sees a second-best solution in collaborative efforts in fundraising, the sharing of knowledge and skills, the development of technology, etc., even if charitable organizations themselves do not merge.

Issues With Charitable Mergers: Typically, charities and nonprofits wait until they are in serious financial difficulty before considering a merger with a similarly themed organization. Even then, employees who are concerned about losing their jobs in a merger will tend to offer resistance. Additionally, personality clashes between leaders and staff in the respective organizations inevitably slow or stop the merger process. In any case, the general experience is that merger talks among charities and nonprofits tend to drag on for years, much more slowly than in the for profit world, despite typically involving much smaller and less complex organizations. Some observers believe that this is because these charitable merger talks tend to proceed without the legal or investment banking expertise that tend to move large corporate mergers to much swifter conclusions.

In a 2010 survey of nonprofits nationwide, a group headquartered in New York called the Nonprofit Finance Fund found that 31 nonprofits merged in that same year and 267 others formed partnerships of one sort or another in order to reduce expenses. These number were out of a total of 1,935 organizations surveyed.

SeaChange Capital Partners: SeaChange Capital Partners is playing the role of an investment banking firm for nonprofit organizations, founded in 2007 by two former partners from Goldman Sachs.

SeaChange initially focused on assisting charities that aid children in finding and pulling together sources of funding for them. In 2011, SeaChange began concentrating on facilitating mergers of charitable organizations, working in partnership with the Lodestar Foundation.

On February 28, 2012, SeaChange announced the formation of a $1 million New York City Merger Acquisition and Collaboration Fund that is designed to facilitate the combination of charities and nonprofits. For example, merger negotiations between two New York City-based dance companies stumbled over the inability of the proposed merger partners to find the necessary funding to cover the severance packages associated with two positions slated for elimination. The fund is intended to cover transitional costs such as this for about 10 to 15 mergers.

If it succeeds as hoped, SeaChange will approach its donors for grants to replenish the fund.