In recent months, our team has written about the many factors driving mergers and acquisitions (M&A) in the health and human service field (see M&A Activity Snapshot, As Market Rollercoaster Continues, Mergers Only Go Up, and Why The Mergers?). Merger and acquisition activity in the field is brisk. Two years ago, the pace of M&A saw a 200% increase over a seven-year span. However, the volume of 39 M&A transactions during the first half of 2013 was 10% below the volume that occurred during the first half of 2012 (see 23 Behavioral Health Mergers & Acquisitions During Second Quarter Of 2013). (We’ll report on the final 2013 numbers when they are available, but for more on individual M&A transactions now, check out the Industry Bulletin section of our website.)
Amid all of this activity, what I have noticed in my work is the big differences in the M&A process of for-profit and non-profit health and human service organizations. For-profit M&A is most often driven by product portfolios, economies of scale, and opportunities for profit and profitability. But, while the environmental drivers of M&A in non-profit organizations are just as great, the chances of an M&A initiative happening are far less. In a great article, Why Nonprofit Mergers Continue to Lag, in the Stanford Social Innovation Review, the authors outline four barriers preventing non-profit M&A:
- A lack of knowledge about when and how to think about mergers and acquisitions among non-profit boards and executives
- A dearth of funding for due diligence and post-merger integration
- A lack of matchmakers to create an efficient “organizational marketplace” through which non-profits could explore potential merger options
- A tendency of directors and executives to look at mergers reactively, as a route out of financial distress or leadership vacuums instead of proactively as an effective growth strategy
What has struck me in working with non-profit organizations around M&A (and was confirmed by authors Katie Smith Milway, Maria Orozco, and Cristina Botero), is that the deciding factor driving a transaction is more about the people involved than about the market. There are three “people issues” in non-profit M&A – boards of directors, senior staff, and the perceived loss of organizational identity.
Boards of director perceptions and preferences – I think there are a few key factors among directors that affect M&A. Some directors aren’t aware of the changing market dynamics, so don’t appreciate the need for proactive positioning and new competencies. Other boards lack financial sophistication about economies of scale, the cost of competition, and their service line portfolios – and, for that reason, can’t appreciate the financial and marketing benefits of M&A. Finally, there are boards of directors who enjoy being on the board of their organization – and are driven by possible “loss of control” in the event of M&A. For more on board education and management issues, check out Getting A Board On Board, Keeping Your Board “On Board”, and Managing Your Boards Of Directors: Strategic Advice For CEOs.
Executive staff roles – There is a reason that I often advise organizations interested in acquiring or merging with another organization to wait for a CEO to retire. Because the possible and potential future roles (or lack of future roles) for executive team members often drive (or prevent) many mergers and acquisitions. The big question…will there need to be the continued employment of any executive team members – and, if so, what are the terms? If this is going to be an issue, it is better to address the executive team retention issue up front. The solution according to Milway, Orozco, and Botero? “Reassigning roles, creating graceful exits, or developing new leadership positions in the merged entity.”
Perceived loss of organizational identity – When “brand name” becomes synonymous with “mission” and “identity”, asking one organization in a merger to change its name can be fatal to an M&A transaction. Changing identity counts on the cooperation of donors, payers, clients, volunteers, board members, executive leadership, and staff. Creative solutions about retaining the “brand” may be essential to making the transaction happen (see New Thinking On Non-Profit Branding).
For more on making M&A work, check out some of the resources in our library – M&A ‘Tips, Tricks & Advice’, Other Weird Arrangements, The OPEN MINDS Guide To Strategic Collaborations, and Planning To Buy Another Organization?.
When I was much younger and inexperienced, I thought “the numbers” could overcome the “people issues” in M&A. Twenty-five years later, I now realize that addressing each of these issues is an essential step in making M&A happen with and between non-profit organizations.