ScaleOctober 17, 2017

Mergers and acquisitions: Is the nonprofit sector ready?

While nonprofit mergers and acquisitions are not a new idea globally, there has been almost no activity on this front in India. Can M&A be used to drive greater efficiency and impact in our sector?
2019-08-28 00:00:00 India Development Review Mergers and acquisitions: Is the nonprofit sector ready?
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Mergers & Acquisitions (M&A) are common in the corporate world; they are undertaken for various reasons–expansion into new markets, increasing market share, acquiring complementary capabilities, and improving cost and capital efficiency. The eventual goal is to maximise shareholder value. In 2016-17 alone, there were more than 600 M&A transactions in India worth USD 61.26 billion. By contrast, there were no nonprofit mergers and acquisitions in India during the same period.

We believe that M&A can be used in the development sector as well–as a strategic tool to drive larger impact and greater efficiency.

Several benefits could accrue for all stakeholders involved

India’s nonprofit sector is large and highly fragmented and characterised by a long tail of sub-scale organisations. Typically:

  • Many nonprofits have overlapping missions, programmes and areas of operation
  • Multiple organisations target the same set of people
  • Funders deal with several small-scale implementation partners, and
  • Individual nonprofits incur disproportionate spends on fundraising, outreach and administration

Mergers between nonprofits can address many of these inefficiencies and unlock benefits for all stakeholders involved: people served, donors as well as the nonprofits themselves.

  • Donors will incur lower search, management and coordination costs with fewer implementing nonprofits; this will free up funds for core activities and investments.
  • Merged nonprofits will acquire complementary capabilities, expedite time-to-market, rationalise costs, attract more funding and talent. More importantly they will be able to offer a better proposition to the people they serve through more holistic offerings, and drive more impact.

Large nonprofits and donors are best positioned to take the lead on M&A

  • Large nonprofits with ambitious missions that are looking for their next area of growth may be better off acquiring smaller nonprofits with complementary products and services instead of building these capabilities organically.
    This will significantly reduce time-to-market and give them access to expertise and technical knowhow as well as customer relationships that may not reside within the organisation.
  • The smaller nonprofits stand to gain as well as they can access larger resource pools, more experienced management, and a platform to scale-up more rapidly. A 2015 study reported that in 88 percent of the cases, merged nonprofits reported being better off, after the merger, in terms of achieving their organisational goals and increasing collective impact.
  • Donors have visibility on their portfolio and able to see cost- and impact-synergies across their grantees. They could consider suggesting integration between nonprofits to drive greater efficiency and effectiveness. In the process also delivering greater ‘bang for their buck’.

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Nonprofit mergers are not a new idea globally

Between 1996-2006, the cumulative rate for M&A among US nonprofits was similar to for-profit firms, at 1.5%.

M&A among nonprofits is not new. As far back as 1942, the International Relief Association (IRA) and the Emergency Rescue Committee (ERC) merged to form the International Rescue Committee. In the US, nonprofits are increasingly looking at mergers as a strategic tool to create more impact.

Between 1996-2006, the cumulative rate for M&A among nonprofits in the US was similar to that for for-profit firms, at 1.5%.

Globally too there are several examples of successful nonprofit mergers. Two prominent ones include:

  • Europe-based nonprofits Self Help International and Harvest Help—focused on agricultural and rural development in Africa—merged in 2008 to create Self Help Africa. It allowed the merged entity to cut back on costs and significantly reduce staff strength while simultaneously increasing capacity to engage in research and advocacy efforts.
  • Save the Children International (STCI) merged with Merlin, a health sector focused nonprofit, in 2013. Post-merger, STCI was able to leverage the latter’s unique frontline capabilities to provide improved health services across 120 countries.

There are some key factors that make M&A amongst nonprofits successful

To catalyse and execute M&A successfully, there are some important pre-conditions that need to play out.

  • Nonprofit founders need to shift their paradigm and look beyond their self-interests, such as control or family legacy towards broader impact and efficiency goals. While founder syndrome is a global phenomenon, it is true more so for India.
  • Enabling regulations. In India, nonprofits are governed by the Companies Act, 2013, the Central or State Societies’ Acts or the various state Public Trust Acts. While all these Acts permit mergers, there are challenges:
    • Long drawn out procedures for initiating and approving mergers
    • Lack of clarity around transfer of property and liabilities (especially legal liability)
    • Unclear rules around mergers between societies in different states or between a Public Trust and a Society. There is need for the government to explicitly articulate and streamline legal and tax procedures and transfer of property and liabilities amongst merging nonprofits.
      For example, the UK Charities Act enables charities to transfer their properties by a simple declaration rather than long-drawn legal procedures.
  • Champions on nonprofit boards to advocate mergers to trustees, directors and staff. This role can also be played effectively by funders who can seed such conversations in their portfolio organisations.
  • Common vocabulary/metrics for evaluating nonprofit mergers just as in the corporate world (e.g., ROI, shareholder value).
  • Specialised intermediaries to provide transaction support such as match-making, due diligence, and funding transaction costs. The Catalyst Fund, Nonprofit Repositioning Fund, Sea Change-Lodestar Fund, and The Chicago Community Trust are examples of such funds in the US.

Related article: Questioning scale as we know it

In conclusion

We are cognizant that as in the corporate sector, there are several risks associated with mergers in nonprofits. These include mission constraints, potential job losses, lack of cultural fit, discontinuation of programmes due to shifted focus, and brand dilution.

Given these risks and faced with an operating environment where definitions of impact aren’t always clear and costs often hidden, nonprofits tend to look for ways to grow organically rather than engage in collaboration, much less merge with another entity.

However, we believe that the right intent and approach, combined with thoughtful execution, can help address these inhibitions and that donors can play an important role in seeding conversations and supporting their grantees through the process.

The past few years have seen the emergence of successful collaboration platforms amongst nonprofits, such as the India Sanitation Coalition (ISC) and Confederation of Indian Organizations for Service and Advocacy (CIOSA). It is perhaps time that we take it to the next level–and seriously explore M&A to accelerate impact.

  1. M&A rate here is defined as the number of legal M&A filings divided by the average number of non-profits over the study period
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