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When Nonprofit Mergers Make Sense

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Investment & Markets
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By Frank Hernandez

In an evaluation of consolidation activity, the Bridgespan Group suggested that the economic recession in 2009 should have triggered a survival instinct as charitable contributions declined -- resulting in more nonprofit mergers and a reduction in the number of nonprofits.

However, the data show that more nonprofits were created, rising by over 7 percent in the period from 2007 through 2011.  One reason for this surprising growth is contained in a new report by the Atlas of Giving, which finds that charitable giving in the United States rose by over 50 percent since 2009 to reach a record of almost $480 billion in 2015.  Since charitable giving expanded, nonprofit survival was not in jeopardy.

In 2016, the economy continues to improve – unemployment is down, the stock market is up and the charitable giving outlook appears on track to better 2015’s record level. While a positive trend in contributions is expected to continue, regional differences exist.  Falling oil prices that generate disposable income for families and corporations with high transportation costs can create uncertainty and cutbacks for firms and individuals that work in the energy industry.

In Houston where I live, the local economy is more diversified than during the 1980s when the area suffered a significant recession as the price of oil fell below $10 a barrel ($22 today). Oil prices dropped to nearly $25 per barrel in January of this year, and energy-related job losses have increased.  Many local charities are worried that the decline in the energy industry will adversely affect donations and volunteer support.  In an interview with the Houston Chronicle, Sandra Miniutti, CFO for Charity Navigator, an organization that follows charities across the country, suggested that it takes about six months for an economic slowdown to affect nonprofit contributions and the second half of this year will be extremely challenging for local charities and beneficiaries.

In anticipation of declining funding, two Houston-area United Way groups agreed to merge in late February. Their merger is expected to realize efficiencies as they combine efforts and no longer compete for charitable contributions.  The decision to merge was difficult because the smaller organization had existed for over 60 years and its leadership wanted assurances that the needs of its community would continue to be addressed.  Indeed, local community donors were asked to approve the merger.  The board of directors also recognized that pride might prevent them from merging with the larger group.  In the end, “mind and heart” got aligned and the local community can expect ongoing support and services.

Successful nonprofit mergers result from the development of a shared vision that creates alignment, manages senior staff roles and responsibilities, and clarifies the combined mission. In the Houston United Way merger, the president of the smaller organization decided to step down after nineteen years heading the group.  In moving forward, the new entity expects to improve services and grow programs where the smaller organization had stalled.  Already, the new organization has guaranteed $4 million in each of the next two years to support the community served by the smaller entity.  This funding level is almost double what was projected had the organizations remained separate.

While it is too early to know if the new larger Houston area United Way will expand support, the negotiations that resulted in the merger appear to follow the recommendations outlined by the Bridgespan Group – create alignment, define roles and blend the brands. Successful mergers require collaboration that involves the board and senior staff from the onset.  Funders should also be engaged in thinking through alternatives and planning support options.

The Houston-area United Way merger represents a positive step to ensure that the local community continues to receive support and service during these uncertain times. By setting aside egos and focusing on the needs of the community, success and sustainability are more assured.  The president of the local United Way put the needs of the community first and agreed to step down to enable a more efficient and productive entity.  Although offered a consulting role in the new organization, she chose to leave so that the two organizations could more easily integrate.

Organizational leadership requires that we put aside personal interests for the good of the community and the organization. I hope that other nonprofits do similar soul-searching and consider mergers and efficiencies when faced with declining support.  The community and our beneficiaries deserve nothing less.

What do you think?

Image credit: United Way of Greater Houston via Facebook

Frank Hernandez is a doctoral student in the Program in Higher Education Leadership at the University of Texas at Austin.

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