1 The authors would like to thank the following for their invaluable contributions to the research supporting this article: Matt Forti, Barbara Christiansen, Chris Lapinig, Meghan Gouldin, Jennifer Chiu, Liana Vetter, Jake Broder-Fingert , Laura Clancy and Kristin Romens Nonprofit M&A: More Than a Tool for Tough Times February 2009 By Alexander Cortez, William Foster and Katie Smith Milway1 Contact: Katie Smith Milway, Partner katiesmith.milway@bridgespan.org (617) 572-2833 Boston 535 Boylston St., 10th Floor Boston, MA 02116 P 617 572-2833 F 617 572-2834 New York 3 Times Sq., 25th Floor New York, NY 10036 P 646 562-8900 F 646 562-8901 San Francisco 465 California St., 11th Floor San Francisco, CA 94104 P 415 627-1100 F 415 627-4575 www.bridgespan.org | www.bridgestar.org The troubled economy has put merging with or acquiring another organization front and center on the radar for the senior managers of many struggling nonprofits. Indeed, a Bridgespan Group poll of nonprofit executive directors found that 20 percent of 117 respondents stated that mergers could play a role in how they respond to the economic downturn. These leaders may consider mergers and acquisitions (M&A) reactively, as a way to shore up finances, to make their organizations appear more attractive to funders or to address a succession vacuum. But the time is also ripe for the leaders of healthy organizations to consider M&A proactively—as a way to strengthen effectiveness, spread best practices, expand reach and—yes—to do all of this more cost-effectively, making best use of scarce resources. Unfortunately, few organizations or funders think of M&A in this way. Nonetheless, it’s true. There is far more potential for M&A to create value in the nonprofit sector than most people realize. The sector is highly fragmented (there are more nonprofit organizations than lawyers in the United States), and the economy has made M&A a mainstream topic of conversation. Now is the time for the strongest, most effective organizations to use it as a strategic tool to further their impact. To do so, they must overcome some barriers. For one, there are no financial incentives driving deals, as there are in the for-profit arena—and that situation is unlikely to change. Moreover, there are few financial “matchmakers” (as there are in the corporate world) to help leaders identify, explore and then finance potential merger options, and scarce guidance on how to evaluate potential deals and structure them so that they’ll work. These latter barriers could fall, however, if even a modest number of funders have the will to dismantle them. What’s needed is a better understanding of how M&A can and has worked as a strategic tool for nonprofits. The sector can boast a number of highly experienced individuals who have helped nonprofits achieve successful mergers. David LaPiana and his organization, LaPiana Associates, Inc., for example, have been involved in this area for years. But to date, general research on nonprofit M&A tends to be based on experience with individual transactions and qualitative rather than quantitative. To address the gap, the Bridgespan Group undertook a research project that focused on the frequency and attributes of M&A activity among nonprofits in four states over an 11-year period. (Please see the below sidebar for more details on the study.) We then drilled down more deeply on one nonprofit field, Child and Family Services (CFS), where M&A seems more pervasive, to understand what market forces may be driving this activity. Finally, we looked at two organizations in the CFS field that are using M&A deliberately to advance their missions. The results suggest that M&A, strategically used, has great potential to create value in the sector. They also suggest lessons for nonprofit leaders interested in pursuing nonprofit M&A and for funders interested in exploring how they can support nonprofit mergers as a philanthropic avenue with high potential for social impact. W