« Vol 2, Issue 1, Summer 2002

Strategic Solutions: Mergers & Acquisitions, Nonprofit Style

You've read about them in the headlines: Hewlett-Packard and Compaq. Time-Warner and AOL. Now the merger movement is landing on the shores of the nonprofit sector. And David La Piana is leading the charge.

La Piana Associates, of which David La Piana is the principal, provides training, research and consulting for nonprofit organizations on what they call "strategic restructuring."

They're now engaged in a major project called Strategic Solutions, a five-year effort funded by the Irvine, Hewlett and Packard Foundations to change the way nonprofits think about and use mergers, joint ventures and other restructuring activities to strengthen their ability to advance their mission. A free resource for the nonprofit field, the Strategic Solutions website had more than 80,000 hits in April 2002 alone.

A wave of mergers first hit the nonprofit sector about five years ago, as an increasing number of nonprofit groups looked to partnerships as a way to increase their market share, shore up their stability, and add to their services. La Piana says that a number of forces are driving the merger wave. One is economic-there's greater competition for clients and contributions among nonprofit groups. Organizations are also joining forces to provide better services.

But not all merger efforts are created equal, he says. The traditional approach-anchored by the hiring of an outside consultant to do a feasibility study-often backfires. "The outside feasibility study is often the kiss of death in a merger negotiation," he says. "There's a consultant running around asking a lot of questions and getting everybody very anxious, but there are no face-to-face negotiations. So rumors start, misperceptions are created, and pretty soon people become disconnected."

Why do so many of the mergers we read about falter? The public's perception of merger failure is based on reading, or experiencing, corporate mergers, La Piana points out. Which is not to say merging nonprofits face an easy road. The same three issues arise time and time again, La Piana says. "The first is autonomy. 'We want to do things our way, and not be beholden to anyone else.' The second is self-interest. 'Am I going to have a job?' 'Am I going to have to move?' 'What's my title going to be?' And the third is what we call 'culture clash,' which is the misunderstandings and conflicts that come when two distinct organizational cultures are combined."

To address these obstacles, La Piana Associates has developed an approach over the course of more than 60 mergers. A primary ingredient is board involvement-they don't even begin a negotiation until each of the boards of directors has passed a resolution committing to "good faith" talks. And a key part of their process is to lay out all the possible issues involved in a merger at the outset of negotiations, rather than one at a time. "Because people tend to latch onto the first concern somebody has and beat it to death," says La Piana, "we won't let them discuss any issue until they finish the brainstorm."

Finally, they focus on the relationships between the two parties. "It's rare that groups who merge do not know each other. You don't marry someone you haven't dated first. So there's a history. And often that history is complicated, so we use the negotiations process to build a healthy relationship."

It might seem counterintuitive that two nonprofit groups that do similar work could look at each other so skeptically. Not to La Piana. "It makes sense if you know the kind of people who run nonprofit organizations and work in them," he says. "What attracts people to the nonprofit sector is a deep-seated value-laden commitment to a social good. This commitment is a primary strength of the sector. But when it comes to partnerships, it's a primary barrier. Over time people may come to believe that only they know how to do it. And the closer aligned two groups are in the field, the more they tend to either know each other and have competitive histories or assume (rightly or wrongly) that they have different philosophies about how to do the work."

The story of how La Piana became the guru of the nonprofit merger began when he was the executive of the East Bay Agency for Children. "During my 16 years as executive director, EBAC grew from serving 20 kids to serving 4,000," he says, "and as part of that growth, we went through three mergers." He subsequently wrote a monograph called Nonprofit Mergers, which was the first serious, generally available piece on the topic (available from BoardSource).

Then, in 1996, the Irvine Foundation commissioned La Piana to do a study of the future role of mergers and partnerships in the nonprofit sector. The results were published in the report Beyond Collaboration which has become a valued resource on the bookshelves of many in the nonprofit world. More than 10,000 copies have been distributed, and it is still one of them most frequently requested pieces from the Foundation. Following the success of that publication, the Irvine, Hewlett and Packard Foundations came together to help La Piana start a firm to aid nonprofit organizations in restructuring efforts. La Piana Associates has since provided management consulting to more than 200 clients, including nonprofit groups, associations, foundations and public agencies.

Why beyond collaboration? La Piana used this title for his groundbreaking report, and coined the term "strategic restructuring," to make the point that there's a continuum of partnership approaches available to organizations (see Partnership Matrix diagram below). At one end of the spectrum is "collaboration," a partnership focused on program work in which both parties preserve their autonomy. At the other end is "corporate integration," in which the locus of corporate control is integrated. Collaboration tends to be episodic, and far easier to manage. Mergers, on the other hand, are harder, because they involve more structural change in which the parties give up autonomous control for shared ownership. The Partnership Matrix identifies six discrete forms of strategic restructuring between these two poles.

Leaders in the nonprofit sector need to think more seriously about restructuring, La Piana says. The chief reason: nonprofit groups face problems that can best be addressed through some kind of partnership with another group. "Leaders think about strategic planning, political connections, fundraising-lots of approaches to a problem-but they tend not to think about working with other groups. Every nonprofit does not need to undergo strategic restructuring. But just as any competent nonprofit executive director should know something about fund raising, strategic planning and financial management, strategic restructuring should be in the tool kit."

Links:

• Strategic Restructuring: Findings from a Study of Integrations and Alliances Among Nonprofit Social Service and Cultural Organizations in the United States
  La Piana Associates, in conjunction with Chapin Hall Center for Children at the University of Chicago, recently completed the first phase of a national study of 192 strategic alliances around the country, the largest study of its kind ever conducted.
• Making a Merger Go Smoothly for Nonprofit Workers
  A June 2002 Chronicle of Philanthropy article explains why collaboration among charities is becoming popular, and why many groups are trying to avoid the mistakes that have caused partnerships to fail in the past.
• Pulling Together: Strengthening the Nonprofit Sector Through Restructuring (PDF)
  Provides preliminary findings of the Strategic Solutions project.
• Beyond Collaboration: Strategic Restructuring for Nonprofit Organizations
  An Irvine commissioned study by David La Piana offers an analysis of restructuring efforts among nonprofits and describes several strategies that funders might develop to support activity in this arena.
• Real Collaboration
  A guide for grantmakers written by David La Piana and underwritten by the Ford Foundation. The guide makes recommendations on how program officers can make better, more effective use of collaboration among grantees.

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