Fight Club
Charities, vying for fewer dollars, are merging - and being subjected to hostile takeovers
Fight Club
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Keith C. Epstein
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Are there too many charities? Amid stiff rivalry
for new dollars, more nonprofits are merging,
corporate-style, to survive.
for new dollars, more nonprofits are merging,
corporate-style, to survive.
Illustration by Mick Wiggins
In the aftermath of the 2001 terrorist attacks, fundraising plunged at the floundering New York-based United Way of Tri-State, with donations dwindling to $11 million from $20 million. Management came under fire for inefficiency: the nonprofit’s office leases on Wall Street seemed, suddenly, to symbolize a tolerance for excess. Worse, the organization was going after the same donors as its parent organization, the national United Way of America.
After ferocious in-fighting and the threat of a legal challenge, the parent swallowed its errant chapter this last October in a hostile takeover. “Many charities just aren’t necessary anymore,” says Manhattan merger attorney Eliot Green, who engineered the takeover. “Due to a scarcity of funds, charities can no longer afford to be inefficient.”
Elbowing into a merger proved far less dicey for Pacific Clinics, a mental healthcare nonprofit just outside of Los Angeles. There, it was a case of the acquired wooing his acquirer. At 65, Susan Mandel was chief executive of a venerable $60 million-a-year mental health nonprofit in the counties around Los Angeles; Jim Balla was an up-and-coming, 49-year-old CEO of a more modest, $13 million-a-year inner-city mental health charity struggling to make it to the next level.
She had all manner of ethnic clientele and influential connections; he had a focus on young people in metro and south L.A. She wanted his rehabilitation expertise, his housing, his IT staff, and an affiliation with his brand, and, nearing retirement, she wanted to know her cause would be left in good hands. Balla, at the same time, needed Mandel even more “for sustainability,” he says, and the chance to compete more strongly for millions of dollars of new state funding for mental heath. Balla courted Mandel, not the other way around.
So finally, this July, after some 27 months of complicated negotiation and restructuring — more than two years after Balla first asked Mandel to “talk about possibilities” over dinner after work one day in December 2005 — it’s all to become official: Pacific Clinics is set to acquire Portals House Inc. and the two will became one. Says Mandel: “Other agencies are afraid of us now, for being an 800-pound gorilla.”
Suddenly, fusion is in fashion. Among nonprofits large and small, an almost private-sector-style merger mania is taking hold. Some are marriages of convenience; some are unions born of frantic necessity, and others are sparked by shared passions and strategic goals, along with the possibilities of collaboration versus competition. Still others are being donor-driven in the name of more efficiency and results. “We’re seeing more dissolutions and more mergers,” says Kevin J. Curnin, a partner and chief of the pro bono practice at the New York law firm of Stroock & Stroock & Lavan.
To be sure, competition for survival in the rough-and-tumble philanthropy world has intensified, as benefactors grow more dubious of differences between the plethora of new advocacy groups that have cropped up in recent years. And donors are more demanding now, too — obsessed with provable outcomes. While some consolidations are lightly urged by funders hoping the groups they aid will take the hint, other mergers are only technically dissimilar to the corporate world’s so-called “hostile” takeovers.
True, there may be no activist investors or profit-driven forces at play in today’s charity arena, but there are, increasingly, activist philanthropists entering the ring, often at work behind the scenes, nudging — if not demanding — merger talks in order to streamline and revitalize the cash-strapped organizations they support. Sometimes, donors put up money to hurry some of the couplings along. Since 2003, the Packard Foundation has given nearly $180,000 to seven organizations to encourage mergers and “build capacity.” Mostly, Packard employs a light touch. “We don’t ever tell them you need to merge and go partner with nonprofit XYZ,” says Shiree Teng, a Packard Foundation program officer specializing in organizational effectiveness. “We do suggest, ‘Have you looked at who else is doing this work and how you might work with them?’”
“It’s a little bit of a shakedown,” says Marcia J. Lipetz, president and CEO of the Executive Service Corps in Chicago, where, she says, six nonprofits have closed so far this year. “And, frankly,’’ says Lipetz, “it’s about time. You can’t sustain all these [similar] organizations servicing similar things in the same community. If you have 10 central offices, 10 office leases, 10 computer leases, and 10 development directors, that becomes tough to sustain.” In the parlance of one lawyer specializing in the burgeoning new field of nonprofit mergers: “acquirers” are lassoing “targets” every day. “They’re not hostile takeovers in the business sense,” says the lawyer, Eliot Green of Loeb & Loeb in Manhattan, “but the negotiations are very intense.”
No fooling. Charities often resist. Most of the time, he says, nonprofit leaders don’t want to compromise. Worse still, Green adds, not everyone in a nonprofit group (usually the weaker one) can see the writing on the wall. “Usually by the time we get involved, there is no alternative,” Green says. “For the weaker organization, it often comes down to this: be acquired or be dissolved.”Green ought to know: the bitter United Way takeover was one of his more celebrated tie-ups.
Green, who heads his Park Avenue firm’s nonprofit-merger practice, says such couplings have been on the rise since 9/11. Before then, Green’s practice would handle maybe two or three nonprofit mergers a year, usually hospitals. But this year, alone, Green anticipates nine big nonprofit mergers involving all types of organizations. Green’s services don’t come cheap: His fees start at $30,000 for fairly simple, uncontested consolidations.
While no one has sweeping statistics documenting the scope of the national charity-merger movement, interviews with a variety of players in the nonprofit and philanthropy worlds confirm the trend is both significant and on the rise. In Chicago, a special corps of retired executive volunteers, called Executive Service Corps of Chicago, is actively engaged in helping nonprofits merge. At the University of Texas at Austin, an entire course is designed to teach students how to help nonprofits consolidate. A recent outcropping of specialized philanthropy arms of major banking institutions have just begun offering new or expanded merger services in hopes of capitalizing on the trend. “Foundations have really been pushing this, too,” observes Elizabeth Boris, director of the Urban Institute’s Center on Nonprofits and Philanthropy.
Ditto consultants. In the charity merger business, they call themselves “strategic restructuring” specialists, people who preach the gospel of cooperation as a survival mechanism. One of the leading such consultancies is Emeryville, Calif.-based La Piana Associates Inc., which specializes only in nonprofit matchmaking. Founder David La Piana’s promise: to help a good cause increase market share, add services, broaden mission, lower costs, attract and retain donors — and often, just simply survive. LaPiana offers nervous suitors and worried acquisition targets an array of life-raft services, from the lightest touch — short-term administrative collaborations involving minimal integration — to more urgent, permanent tie-ups, such as joint ventures, parent-subsidiary relationships and full-out mergers. The more desperate an acquisition target, the higher its chances of losing autonomy in a tie-up.
La Piana says the most winning mergers can help nonprofits cut costs by up to 15 percent and calm skittish donors. The December union of the Denver-based Young Audiences of Colorado and the Colorado Alliance for Arts Education has already led to new contracts from donors who’d been worried about overlap.
Of course, in any power struggle — even the most friendly ones — there is always, at least, some difficulty getting two parties to dance. For the acquired, giving up independence and power is “where all the tension comes in,” says La Piana. “The business reasons may be plain that restructuring is a good idea. It might even be a life-and-death idea. But the autonomy issues are the toughest ones, chiefly that sense of ownership, that sense that it may be a leaky boat, but it’s my boat.” Admits Portals House’s Balla, whose organization had to follow, rather than lead, in its merger waltz with the larger Pacific Clinics: “It was hard. It was like giving a baby away.”
And learning to let go is usually the easy part. After the founders get their heads (and emotions) wrapped around the idea of a merger — and if they do — then it’s time to get everyone else on board. That, too, can be a heartache and headache: executive directors can get ushered out. Board members often lose their positions or acquire new roles; staffers often lose jobs, too — or gain new duties.
Fees for helping to keep in-house bruisings to a minimum while hastening the journey toward restructuring and then integration can run from $20,000 to well over $50,000 — depending on how willing, or able, everyone is to play nice. Complications requiring specialists can crop up over leadership struggles, fights over new marketing messages, and thorny, intricate legal work and accounting. Many groups, rather than punch through it themselves, hire out or secure pro bono legal services. Some nonprofits have been known to score grants to pick up the tab. Quips one self-described “burnout” candidate recalling her merger experience: “It was cheaper than therapy.”
Still not convinced? Fading — if not gone — is the stigma of entering the merger ring to begin with. “Ten years ago, it was almost an admission of failure in the nonprofit world if you said you were looking for a merger partner,” observes La Piana. “Now it’s being seen as strategic.”
Donor-driven mergers
La Piana’s own practice, ironically, owes much of its own birth and survival to just such a strategic merger — or three. Some 10 years ago, La Piana was approached by a group of donors — in this case, the heirs of the Hewlett- Packard fortune. They and the executives of their family foundations — the David and Lucile Packard, James Irvine and William and Flora Hewlett foundations — were becoming worried that many of the nonprofits hitting them up for money seemed suddenly to be losing their way and their focus, awareness of shared goals, and attention to in-house efficiencies. In request after request for funding, the families and their grant managers started seeing a slew of new charities asking, in many cases, for too much money to fund too many copycat programs and initiatives. Worse, the grant applications, when taken together, formed an alarming picture of overlapping programs, gaps in service, battles over turf, and a lack of coordination with like-minded rivals seeking to serve the same sets of needy people in the same types of ways.
It got La Piana thinking. Around that same time, the late 1990s, the corporate world had begun to wrestle with some excess of its own — and responded by busting time-honored boundaries with big mergers and forceful takeovers that streamlined overhead, enhanced revenues, beefed up shareholder returns and delivered stronger brands to larger markets. Could consolidation of nonprofits enhance philanthropic results in similar ways?
La Piana had a personal interest in finding out. For 15 years, he’d headed a rapidly growing Bay Area mental health nonprofit of his own. That organization, the East Bay Agency for Children, had merged once well, but a second time so poorly it lost tens of thousands of dollars, and finally, a misbegotten third merger resulted in firings, a shuttered clinic, and the neighboring Oakland community’s ill feelings — in short, a full-scale public relations disaster. Surely, La Piana agreed, there had to be a better way of merging. The Hewlett-Packard families throught so, too, and gave La Piana $3 million to create a set of best-practices and a merger consultancy that would help encourage more responsible giving across the sector. La Piana established some methods for mergers in the philanthropic world, and then set about to prove they could work. Since setting off on his own as a business in 1997, La Piana and his associates have guided more than 150 nonprofit mergers and dozens of other philanthropic partnerships — all aimed at better tackling an array of social problems, from AIDS to poverty to domestic abuse.
How bad is the charity glut? Consider the numbers: Today, there are around 1.4 million nonprofits, about half of them new since 9/11. Sustaining so many over the long term may be beyond market capacity; with giving stuck at around 2 percent of individual donor income — despite a concurrent growth in the number of donors giving — there may not be enough new deep pockets to keep up with any further surges in the number of charities.
Indeed, say fundraising experts, the philanthropy explosion may be nearing its peak. “There is real pressure,” notes the Urban Institute’s Boris. “Can the economy sustain the number of organizations that exist?” And rivalry for public attention and donor largesse among nonprofits has never been so brutal, she says. The threat of organizational mortality — or at least a decline in any nonprofit’s capacity to maintain quality services amid the current pace of expansion — is real.
Statistics gird such perceptions. According to data compiled for CONTRIBUTE magazine by the Urban Institute’s National Center for Charitable Statistics, over the last five years, nonprofits have been fading away at a bit of a faster clip than was normal prior to the post-9/11 surge in new charities. In each recent year, nearly 4 percent of nonprofits died, compared with less than 3.3 percent prior to 2001. Organizations devoted to social services, health, the arts, sports, and religion have been disappearing well above such normal death rates. Observes the charitable statistics center’s director, Thomas H. Pollak: “There’s at least some accumulating evidence that it’s easier to start a new organization but much harder to sustain it.” (See “Shakeout!”, above.)
All the more impetus, then, for the new merger movement and its champions. Says Marguerite H. Griffin, one of the nation’s new legion of so-called “wealth advisers” — people who help high networth clients choose the right targets for their philanthropic dollars: “Donors are very confused about what the organizations’ stories are and how they’re different.” Griffin sees a lot of that confusion in her job in the philanthropy arm of Chicago-based Northern Trust Bank. “Nonprofits, meanwhile,” Griffin says, “are having trouble distinguishing themselves.” Especially since the 2001 terrorist attacks, she says, “wealthy donors have been asking: ‘How can we be more efficient and leverage our dollars more?’ That’s when conversations start to revolve around the question, Do we really need all these nonprofits?”
Hate mail
Raising such questions, especially now, isn’t winning any popularity contests for Griffin or her colleagues in the merger movement — at least not among many charities. Griffin is the first to admit that she’s unsettled some nonprofit leaders in recent months with her provocative public presentations on the need for nonprofit mergers. After a recent presentation in New York, hate mail flooded her in-box. One woman complained that forcing mergers would stifle creativity and innovation.
Griffin is unfazed. “Merging can be equally creative and good for philanthropy,” she counters. With a merger, donors would have confidence that the nonprofit has thought about efficient use of resources, that they’d be good stewards of that money. To not consider [mergers] and have your head in the sand is misplaced. If you go it alone, you’re disconnected and there’s a lot of waste. Donors just aren’t interested in that anymore.”
Rockefeller Philanthropy Advisors CEO Melissa Berman agrees. In New York City alone, she counts at least 24 literacy organizations, though stresses that some similarities may be only skin-deep: one literacy group that focuses on adults who slipped through educational cracks is hardly a clone of another literacy group that focuses on teaching English to recent immigrants — but how many donors are going to take the time to find out? And further, even if two literacy organizations target two different populations, they still have a set of similar administrative burdens and require employees with similar skills. Couldn’t a gaggle of various literacy organizations, regardless of their target populations, benefit cost-wise from some form of administrative consolidation?
Berman isn’t the only one wondering. “It’s mind-boggling that in the city of New York there are more than 80 organizations devoted to breast cancer,” observes New York Private Bank & Trust chief executive William R. Fuhs, who is actively exploring the creation of a New York nonprofit to identify organizations ripe for consolidation. “Is breast cancer a worthy cause? Absolutely. Are the people involved because of an impact on a family and friend? Probably. Do you need 80 to have the same net impact? Or could you have less and have a larger impact?”
Yet for all the talk of mergers, there are some who worry that the merger movement may discourage nonprofit innovation. “Should people who run nonprofits be tested by funders? Absolutely. But should that efficiency eclipse passion for a cause? Absolutely not,” says Curnin, the Stroock lawyer. “We’ve seen stranger things in New York than a shoestring, potentially redundant community service provider that, after 20 years, nobody would want to live without.”
Keith Epstein, a regular contributor to CONTRIBUTE, is an investigative reporter in the Washington bureau of BusinessWeek magazine.
