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Nonprofits: Misery loves company

The struggling nonprofit world may be on the cusp of a merger boom.

By Lawrence Delevingne, Reporter
Last Updated: February 20, 2009: 1:00 PM ET

Boston-area Centro Latino de Chelsea's workforce education program includes English classes, computer classes, and other training services. Its reach would be expanded by a merger with Concilio Hispano, a similar group.
A father and daughter in Phoenix participate in a class given by the New Directions Institute for Early Brain Development, one of six nonprofits acquired by the Arizona‚??s Children Association since 1999.
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NEW YORK (Fortune) -- The past year has been tough for Centro Latino de Chelsea and Concilio Hispano, two Boston-area charities serving the Hispanic community. Centro says it doesn't have the money to expand; Concilio is without a permanent leader or much staff for administration. Both face significant reductions in funding.

So they did what for-profit companies do: They discussed a merger. Centro's Executive Director, Juan Vega, says he hadn't seriously considered such a move until last year, when he read a report by The Boston Foundation suggesting that organizations should consolidate rather than compete for an ever-dwindling pot of funds.

"Individually we were going to be hitting some really hard times," he says. "There was an opportunity here for [Concilio] to be able to sustain what they have and for [Centro] to be able to strengthen what we have." The merger is expected to be completed by the spring.

In the for-profit world, mergers and acquisitions are way down because of the poor economy, but the recession appears to be having the opposite effect on non-profits. Many directors of charities are now thinking like Centro's Vega. A recent survey by The Bridgespan Group, which consults 501(c)(3) organizations, found that 20% of nonprofits say merging will play a role in their survival of the down economy.

If most of them go through with those plans, that would be much higher than the historical rate. A Bridgespan report to be released later this month found that 1.5% of nonprofits engaged in at least one merger or acquisition between 1996 and 2006 - roughly the same rate as for-profit companies (1.7%) during that time.

This strong urge to merge is an indicator of how severe the recession and financial crisis has hit the nonprofit world. Large foundations, major grant makers to charities, lost nearly one-third of their assets from 2007 to 2008, according to The Chronicle of Philanthropy.

"There's every indication that things are going to be pretty bad," says Tom Pollak, program director of the National Center for Charitable Statistics at the Urban Institute.

Charities, unlike for-profit firms, can't liquidate and send the money back to their donors, like corporations, which can sell their assets and return cash to stakeholders. Dissolved charities are forced by the state to send their assets to similar groups for a de facto kind of merger. Merging preemptively allows them to at least save staff and key services.

"I would expect to see significant growth in mergers in 2009," says Pollak, "but most will be 'mergers of unequals.' Stronger organizations absorbing failing ones."

The Bridgespan survey found that smaller nonprofits like Centro and Concilio, with annual budgets of less than $3 million, are especially keen on merging, with 29% considering it. Nonprofits in the child and family services sector are the most likely type to merge, with about 7.1% merging between 1996 and 2006.

As in the for-profit world, nonprofit mergers are never a simple matter. "While we all like to think that non-profits are all about 'do good and do well out in the world,'" says Kristin Ficery, an Accenture partner who focuses on M&A, "they do have different cultures and they do view things differently...that certainly is something very important to manage."

Vega, the executive director of Centro, says that talks between his organization and Concilio - which both help poor Hispanic families with education, job training and other counseling services - began late last summer but are still ongoing. The idea is to bring Centro's stronger administration to Concilio's wider geographic reach. Centro's budget is only a bit bigger - $1.4 million to $900,000 - but much less dependent on state funding, which is being cut in Massachusetts due to a $1.1 billion state budget deficit.

Despite their shared mission, getting egos out of the way was a challenge. "There's a tendency to be highly competitive," says Vega. "It was significant to have the boards independently say, 'You know what, there's another way to do this.'" He adds, "It's almost like you have to confess a weakness."

Advisors who specialize in nonprofit mergers report record demand for their services since September. "There's a dramatic increase in interest," says David La Piana, founder and president of Emeryville, Calif.-based La Piana Associates, which provides M&A, restructuring, and consulting services to nonprofits.

He says his firm has twice the usual number of active merger projects and received 40 inquires in January after getting 160 all of last year. "They're anticipating losing large chunks of their funding," he adds, "and thinking that they need to band together with someone who's more sound to continue providing their services."

Some who come to him seeking to do a merger, however, often walk out the door with a different strategy. He counsels that groups can alternatively combine fundraising efforts, collaborate on a specific program, or share office space and other administrative costs. "There are a whole range of partnerships," La Piana says.

But others argue that a nonprofit merger deluge, rather than the historical trickle, would be good for the industry on the whole. Earlier this week, state senators in Massachusetts said nonprofits will need to consolidate to make up for a decrease in state funding. On the west coast, the San Francisco Department of Public Health also recently formed a working group to facilitate mergers among community groups.

Fred Chaffee, president and CEO of the Arizona's Children Association (AzCA), says many mergers have been a long-time coming. "Well before the economic climate that we're in today," he says, "there was a need ... for like or complimentary agencies to figure out a way to come together."

He should know: AzCA has absorbed six smaller groups, the first in 1999, the most recent last year. Originally focused on the Tucson area, acquisitions have helped it now provide child welfare and behavioral health services across Arizona. Its budget has gone from $4.5 million to nearly $40 million a year. On average, Chaffee says, each group doubled the number of people it served by reducing cost-per-client by more than a third.

"If you can figure out a way to preserve people's missions and their brand," he says, "there's really efficiencies in coming together." To top of page

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