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M&A in the Social Sector

Posted March 23, 2009 9:00 PM by Ted Jackson

It has been an interesting seven months since I have written about the potential for Mergers and Acquisitions in the nonprofit sector. The question in my mind has always been about how you would conduct mergers with nonprofits. What would be the incentive? Where would the money come from? The payout might be more efficient delivery of services, but the people that get the services typically are not paying, so they cannot force consolidation in the industry. The New York Times might have answered my longstanding question today.

Local foundations play a key role in the success of local nonprofits, and sometimes, when the economy is bad, and other funding sources dry up, many more nonprofits turn to these local foundations and beg. Stephanie Strom from the New York Times wrote about this phenomenon over the weekend in an article titled As Detroit Struggles, Foundations Shift Mission. She writes that in many ways, these local foundations are the funder of last resort.

For better or worse, that leaves the foundations with a bit of power. The two easy options are to let the charity go bankrupt or to make a grant to the charity. The third option, a bit more complicated, is to force the organization to merge with a similar or complimentary nonprofit organization in the same geography. Ms. Strom writes that it is not an easy choice for foundations who see both theater and opera as well as social services. I applaud the effort and hope that there is more of it.

This is a critical time for charities. Most have seen huge jumps in demand for their services combined with a drop off in funding. This is the perfect opportunity for local foundations to squeeze the extra overhead out of two similar organizations by encouraging them to merge. It should also drive economies of scale. I look forward to reading more about it.

Nicole Wallace wrote in The Chronicle of Philanthropy, March 12, 2009, that nearly one in five charities considered mergers and acquisitions as part of their outlook for surviving in today’s economy. The article aptly titled “One in Five Charities Considering Mergers to Help Survive Hard Economic Times” points to a study by the Bridgespan group that shows M&A occurs at a similar rate in nonprofits as in for profits. The merger rate changes based on the type of charity. Social Service organizations merge at a much higher than average rate, while education organizations are much lower.
# Posted By Ted Jackson | 4/2/09 7:17 AM
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