Nonprofit mergers and alliances

Nonprofit mergers and alliances

Nonprofit Mergers and Alliances Nonprofit Mergers and Alliances SECOND EDITION Thomas A. McLaughlin John Wiley & Sons, Inc. Copyright © 2010 by Thomas A. McLaughlin. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropri- ate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. 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ISBN-13 978-0-470-601631 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 To Gail, Paul, and Emily vii Contents Acknowledgments xiii Introduction xv Chapter 1 A Valid Strategic Option for the Future 1 Government’s Retreat Chapter 2 The Freestanding Nonprofit and Other Rugged Individualists 5 Why Nonprofi t Services Are Fragmented: A Story A Nonprofi t’s Economics Are Part of Its Strategy Chapter 3 Logic of Integrated Service Delivery 17 Applications of Integrated Service Delivery Elements of Integration Chapter 4 Deciding to Collaborate 25 Rescue Mergers Merger from Strength Deciding to Collaborate as a Function of Larger Forces Chapter 5 Preserving Identity 33 Nonphysical Components of Organizational Identity What Is Not Part of “Identity”—and What Is Chapter 6 The Role of Funders 37 What Funders Can Do Funding Collaborations vii Models for Funding Collaborations Quality Assurance through Foundations Chapter 7 C.O.R.E. Continuum of Collaboration 47 Our Model Applying the C.O.R.E. Chapter 8 Economic-Level Collaboration 53 Sharing Information Bidding Jointly Joint Purchasing Chapter 9 Responsibility-Level Collaboration 57 “Circuit Riders” High-Integration Collaboration Models A Cautionary Note Chapter 10 Operations-Level Collaboration 61 Shared Training Joint Programming Joint Quality Standards Chapter 11 Corporate-Level Collaboration: Merger 65 Authority Is Concentrated Offi cial Start Dates May Be Anticlimactic What It Means to Merge The Essence of a Nonprofi t Merger Advantages and Disadvantages of a Merger Chapter 12 Models of Collaboration: Merger by Management Company 83 Structure Control and Governance Advantages of a Management Company Disadvantages of a Management Company Faulty Integration in a Management Company Model Chapter 13 Models of Collaboration: Alliances 93 Structure viii Contents Chapter 14 Models of Collaboration: Partnerships with and between Nonprofits 99 Structure Control and Governance Special Considerations Partnerships with For-Profi t Companies Limited Liability Companies Chapter 15 Merger Myths 107 We Will Save Administrative Costs There Will Be Massive Job Cuts We Will Lose Our Identity Let Us Figure Out the Structure First Shhh Only Failing Organizations Merge Increase in Mergers Is a Product of an Economic Downturn Chapter 16 First Steps 113 Geographic Proximity Absence of a Permanent CEO Nonoverlapping Markets Industrializers and Prototypers Compatibility of Services Special Assets Role of Culture Role of Class Quick Culture Check Building Trust Seeds of Trust: Disclosure, Consultation, and Collaboration Chapter 17 Merger or Alliance? How to Decide 131 Corporate Control Chapter 18 First Phase of a Merger: Feasibility Assessment 147 Informal Phase of a Collaboration Role of Consultants Form a Collaboration Committee Contents ix Why Due Diligence? What Is a Due Diligence Investigation? Governance Finances Assets Liabilities and Obligations Some Financial Red Flags Valuations Carrying Out the Valuation Pro Forma Financials, Including Cash Flows Regulatory Filings Human Resources Information Assess the Feasibility Chapter 19 Second Phase of a Merger: Implementation Planning 175 Form Subcommittees of the Collaboration Committee Internal Communication External Communication Some Sample Collaboration Committee Structures Who Will Be the Boss? Some Tools to Accomplish a Leadership Transition Once the Selection Is Made . . . Creating the Formal Agreement Merger Announcement (Create a Splash) Chapter 20 Third Phase of a Merger: Integration 205 Time Required for Integration Common Sources of Resistance Chapter 21 The Seven Stages of Alliance Development 219 Categories of Alliances Seven Tasks of Alliance Development Task One: Initiate, Explore, and Analyze Task Two: Synthesize and Plan Task Three: Establish Shared Objectives Task Four: Develop Working Committee Structure x Contents Task Five: Gain Quick Victories Task Six: Secure Institutionalize Buy-in Task Seven: Implement and Evaluate Chapter 22 Postscript and Conclusion 251 About the Author 253 Index 255 Contents xi xiii Acknowledgments E ven more than the fi rst edition, this version has benefi ted tremen- dously from the contributions of many individuals. Since that fi rst edition was published, I have consulted to more than two hundred nonprofi t mergers and alliances, and virtually every single one provided an important insight or a fresh perspective. I carried out my fi rst mergers for Dr. Yitzhak Bakal at what is now known as the North American Family Institute, although I would not have said that ’ s what I was doing at the time. It was on this initial base of experience that I later built a successful consulting practice in nonprofi t collaborations. I applied some of my early methodolo- gies on behalf of Punky Pleten - Cross, Kathy Wilson, Dianne McCarthy, Geri Dorr, and Deb Ekstrom. Early on, a handful of individuals made valuable suggestions, challenged my concepts, or helped clarify parts of my thinking. Ginny Purcell, Jim Boles, Kitty Small, Bill Taylor, Jim Heller, Rob Hallister, and Sue Stubbs are among these. I have had the benefi t of working with many talented colleagues. For nearly a decade, Stacey Zelbow has supported and challenged me as we worked with various nonprofi t collaboration clients too numerous to count. Her steady presence has been an enormous benefi t, and her detailed comments on an early draft of this edition helped improve it far beyond what I could have achieved on my own. Over the years, literally dozens of leaders in foundations, asso- ciations, nonprofi t federations, government agencies, and academic institutions have given me the opportunity to speak to their members and constituents about collaborations in one way or another. I deeply appreciate these opportunities to hone a message that resonates with large numbers of nonprofi t leaders. My colleagues at the Nonprofi t Finance Fund have been wonderfully receptive and accepting of this new kind of consult- ing capability that I have recently begun building on the excellent foundation they laid over the last twenty - nine years. Clara Miller, [...]... program models and out-of-date corporate structures Those resources are both financial and human, and we must find a way to tap into them as never before Nonprofit collaboration through mergers and alliances is a crucial means to make this happen For many parts of the nonprofit sector, mergers and alliances must be one of the primary strategic choices of the future Nonprofit Mergers and Alliances, Second... much we must all learn about both the process of merger and alliance development and how to manage the new entities that they create But there is no doubt that it is time to begin this grand restructuring of society’s most underrecognized and underappreciated sector Let the rebirth begin Nonprofit Mergers and Alliances Nonprofit Mergers and Alliances, Second Edition by Thomas A McLaughlin Copyright... because managers and board members who understand these dynamics will be able to make the process work for their missions and their consumers, and it is to them among others that this book is addressed We have two goals for this book The first is to describe a context for nonprofit mergers and alliances, including a discussion of the forces helping to shape nonprofits’ use of mergers and alliances It is... organization together with another whose chief executive officer is excellent at overseeing operations; and so on 1 2 Nonprofit Mergers and Alliances Note: Why Mergers Have a Bad Name One of the reasons why mergers may have a negative connotation for nonprofit board members and managers, aside from the botched for-profit mergers the media have covered so thoroughly, is because of when they occur In any industry... realize 5 6 Nonprofit Mergers and Alliances Why Nonprofit Services Are Fragmented: A Story The three youth-serving organizations, part of the same name-brand nonprofit federation, were each located in different large cities within 15 miles of each other Surrounding the cluster of cities was an expanded ring of suburbs and exurbs Each organization had been founded within a few years of each other, and together... inherent motive to spur growth, and the inability to raise large amounts of capital are powerful The Freestanding Nonprofit and Other Rugged Individualists 7 elements that tend to keep nonprofits isolated from each other and fragmented in service delivery Yet the rise of globalization (and its cousin, regionalization) is pushing nonprofits together, like it or not Mergers and alliances lower those self-defined... reader will notice more references to mergers than alliances There is a disarmingly simple reason for this tendency too—there are far more mergers than alliances A secondary reason is that many people equate a brand name with a corporate entity and they conclude, wrongly, that if a merger occurs, it means at least one brand name will go away Therefore, if a brand name persists after some form of collaboration... analyses; and a section each on the processes of mergers and alliances It is worth noting that, while the author has worked in nonprofit collaborations virtually across the board, many of the examples in the book are drawn from a handful of fields, such as hospitals, arts organizations, and social services The reason for this is twofold First, most people are likely to be at least somewhat aware of mergers and. .. adjustment counseling, and so forth Most immigrants need at least one of these services over a period of time, and many need more than one Foreign Neighbors Institute (FNI) is a $2.3 million recently merged nonprofit organization dedicated to helping its 8 Nonprofit Mergers and Alliances city’s Vietnamese immigrants Its revenues come from a variety of sources, including state and city government, a... will put more pressure on groups to merge and find new ways of collaborating 2 It will make it likely that for-profits will enter or expand their positions in fields where nonprofits have traditionally been active For reasons discussed earlier, nonprofits cannot raise significant amounts of capital, and this will handicap their ability to respond to the demand for integrated services Networks of nonprofits . operations; and so on. Nonprofit Mergers and Alliances, Second Edition by Thomas A. McLaughlin Copyright © 2010 Thomas A. McLaughlin 2 Nonprofit Mergers and Alliances . Nonprofit Mergers and Alliances Nonprofit Mergers and Alliances SECOND EDITION Thomas A. McLaughlin John