So What is New to Say about Mergers, Joint Ventures and Alliances…

in the Nonprofit Sector

by Kent Eklund

At the December 16, 2008, summit on the financial health of the nonprofit sector sponsored by the Minnesota Council of Nonprofits, Jon Pratt forecast that he expected in this turbulent economy there would be many explorations of mergers, joint ventures and alliances.  The motivation for this statement relates to the tremendous growth in the sector and the feeling that there simply may be too many nonprofits for the carrying capacity of the philanthropic community. 

What do we know about the prospects for such collaborations?  What predicts to successful partnerships or collaborations?  Cincinnatus has been involved as the middle person in several over the years and has come up with several helpful considerations or principles that improve the chances for success – note we did not say guarantee.  There are no guarantees in life and this applies especially to this topic.

1. Being clear about motivations for interest in the topic.

Organizations come to the conclusion that conversations/explorations of some form of partnership makes strategic sense.  Being clear as to the motivations internally at the outset is extremely important.  Pursuing a partnership for the pursuit of a partnership itself is not satisfactory: there must be some strategic reason for the pursuit.  Is it to augment services to a common client base?  Or is it to solve a financial or staffing crises?  Is it a way to access a seasoned leader or management team?  Is your motivation to access sets of expertise you do not want to acquire internally?  Or does the motivation stem from the donor community pushing back on the redundancy in an organization’s field of endeavors?  Understanding the organizational strategic motivation helps determine the structure of the partnership you are likely to pursue.

2.  Mission Compatibility

Missions are often summarized in statements meant to convey to the world an organization’s core reason to exist.  If there is not substantial overlap in this category, no hope for a successful merger exists.

3.  Value Compatibility

Many nonprofits have value statements and many are truly “mom and apple pie.”  A truly in depth process of unpacking the values comes early in any conversation about potential partnerships.  The ultimate attempt is to get to a compatible worldview.  Do the potential partners view their worlds in compatible ways and do they have similar views of their roles in their environments?  In the private sector, this is sometimes includes a positioning statement.  An example would be the role of their clients in the delivery of services – passive recipients of services provided by experts or active participants in the design of a service package.  We have been amazed in our work how similar organizations, starting from compatible missions, develop such different approaches to living out their missions.

4.  Vision compatibility

This could have been part of the value conversation, but there must be a common vision of the future of both the services the two organizations provide as well as some commonality in their views of the environmental changes likely to effect the two organizations.  This vision of the future provides the basis for a conversation about their joint position in that future.  Even in such turbulent times as these, some common assumptions about likely scenarios for the future are important.

5.  Services compatibility

This gets particularly tricky.  Organizations that have been more in the competitive mode, providing the same services to the same type of clients within the same marketplaces often have difficulty getting over their history of competition.  Partnerships or mergers where the partners meet at the same client with complementary services provides both organizations with the “mission cover” of extending services to existing clients.  Organizations who have essentially been offering the same services but within different geographies have greater chances of success.  Sometimes it takes the suggestion of external stakeholders such a funders or supporters to raise this compatibility factor – the merger of the two United Ways in the Twin Cities of Minnesota was enhanced by the influence of corporate organizations with a presence in both cities asking for a careful consideration of the need for two United Ways.  This conversation ultimately led to a successful merger.

6.  Culture compatibility

Unfortunately, this is the most critical and the most difficult to assess.  Although values and worldviews are often part of the culture, what we are talking about in this factor is the internal climate of the organization.  We believe culture is to an organization what a personality is to an individual.  How does it feel to work in each organization day in and day out?  What are the working assumptions about the role of employees in the organization?  How hierarchical is the organization in day-to-day decisions?  Part of the psychic payoff in most nonprofits is the development of a perception of a certain uniqueness to each organization summarized in the following statement, “Sure there are others who do similar things to us, but we do them in a uniquely different way that truly sets us apart from others!”  That mentality can get in the way of partnership conversations.

7.  Courtship and due diligence

Most marriages are well served by a period of courtship.  All partnerships benefit from some experience of limited engagements prior to more full- scale partnerships.  These early periods provide the mechanisms and data points to assess the earlier characteristics of this article and most importantly, give some early tests of the cultural barriers and compatibilities. 

8.  Importance of managing the board and staff expectations

Even conversations about alliances, partnerships and particularly mergers in and of themselves can create stress.  Keeping the lines of communication open and as transparent as possible is very important.  This is not to say that there will be stages in the planning conversations that depend on confidentiality: the goal is to keep people as informed as possible along the way.

9.  Use outside help

Bringing in an outside, neutral facilitator as well as the financial and legal team in the due diligence process offers the added comfort that there will be fewer surprises during the partnership.  Structuring the deal as carefully as possible manages the initial set of expectations and sets the base for a successful launch.  Joint funding of these services is an early indication that the partners are serious about the partnership.

10. Even a decision to not proceed is worth the effort

If any of the factors mentioned above prove to be deal killers, the fact alone that the organization went through the process often means both organizations have learned a great deal about themselves and that alone may be worth the effort.  We facilitated a conversation about a merger of two disability services organizations that ended with a mutual decision not to merge, but both organizations felt they learned much about themselves and each other in the process.

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So What is New to Say about Mergers, Joint Ventures and Alliances…

in the Private Sector

By James Hawley

In pondering this topic, I thought about ways to repackage this conversation, create some new buzz words or acronyms that would suggest I have the key that would unlock the door to a whole new world and perspective on strategic transactions.  The truth seems to be, in this area, everything old is new again.

I would submit the issues present transcend whether you are a non-profit or for-profit entity.  In either environment, you are trying to add and /or create value – whether that is improved mission delivery in the non-profit sphere; or the creation of owner value in the for-profit world.

We have all seen the headlines regarding the low success rates of merger transactions.  There have been numerous articles written, surveys taken and studies conducted.  Due to the differing measures of success employed, it is difficult to come up with an overall success rate.  Being parochial, I’ll go with a statistic from the Carlson School of Management  - University of Minnesota – who put the failure rate at 60-70% in 2007 research.  For those wishing a second opinion, a 1999 research report published by the global CPA firm KPMG concluded in their analysis that “ … 17% of deals had added value to the combined company, 30% produced no discernable difference, and as many as 53% actually destroyed value.”

So, we’re in the 1/2 to 2/3-failure rate as far as turning that shiny object we’re chasing into something of sustainable value.  Reflecting on my personal experience having been involved in dozens of transactions over the years as part of both the acquirer and acquiree organizations (Note: I don’t believe in the concept of “merger of equals.”  There is always an “er” and an “ee.”), I personally brainstormed a top ten list for someone considering the pursuit of a strategic transaction.  With apologies to Mr. Letterman, here is what I came up with:

1. Know yourself.  That is, - Is this transaction aligned with the vision and mission of our organization?  Anything short of “Yes!” should give pause for reflection, and an intellectually honest analysis of the pursuit.
2. Know your market.  When was the last time you did a market analysis, based on some level of science in your research.  This transaction cannot be about what we think we know.  Given the organization’s time, talents, and treasures that will be invested in this transaction; the conduct of market research is used to improve the odds of success.
3. Know your competition.  Again, we know what we know.  Be willing to admit that we don’t know what we don’t know.  Put some time into investigating the potential sources of competition.  And, remember, we are in a global economy indeed.  That competitor may not just be down the street and around the corner.
4. Revisit your mission and strategy.  You believed the proposed transaction is consistent with who you are and what you are trying to accomplish in step 1 above.  Spend some time pondering what things will look like downstream. 
5. Embrace the reality that negotiating the deal is the easy part.  For all the time and energy invested in researching, proposing, and pursuing a potential deal – even the pain involving valuation discussions – remember that this is the easiest part of the transaction.  The experts that I have read over the years, and situations I have walked into both support that you may very well need to spend, at a minimum, at least as much time in the integration phase as in the identification and negotiation phase, and often times more depending upon the complexities present among the parties to the transaction.
6. Overcome the urge to under-support a disciplined integration plan because it is often not a glamorous pursuit.   Metaphorically, if you can accept a sports analogy, doing the deal is like playing quarterback on the football team.  You get the glory for completing the pass.  As shown in the statistics above, though, doing the deal doesn’t get the ball into the end zone for many of the transactions.  Integration is like playing in the offensive line.  If the offensive line isn’t controlling the opponent at the line of scrimmage, the ball won’t get to the end zone.  Offensive linemen often don’t get much recognition and notoriety - mostly when they have committed an infraction of the rules.  There is no way around it, implementing the best practices for the newly combined organization takes planning, communication, and broad-based participation from the members of each transaction team.  
7. Trust the person in the mirror, but verify his or her assertions.  This is similar to the first item, modified, to be aimed in a more personal manner.  Entrepreneurs can be optimistic to the point where an opinion stated aloud three times can become a fact.  It is imperative that you as the CEO, or transaction-driving executive, have a credible sounding board for your pursuit.  This is, of course, not only true in the acquisition arena, but it is extremely important for reasons that are hopefully obvious.  Whether it is your board of directors, your colleagues on the management team, a network of executives you may belong to  - search out objective feedback for your strategy.
8. Accept that “facts are stubborn things,” and that due diligence may well reveal or accentuate them.  I wish I had cognizance of the John Adams citation much earlier in my career.  Too many times the smoke identified in due diligence is left unattended, and then as the post-transaction flames begin to do real damage, necks are thrown out of alignment trying to find and punish the arsonist.  I recall being roundly criticized earlier in my career by a division vice president who wanted to do a deal, and was chagrined by my diligence finding that the company to be acquired had broadly sampled their product (a piece of equipment – a razor in the razor & blade metaphor) in pursuit of market acceptance and had a very meager system of tracking to whom the product had been issued.  The deal went through, and one of the first pieces of business was a write-off of assets due to the inability to find the equipment that had been acquired based on the schedule that was attached to the acquisition agreement.
9. Make sure your team can execute the playbook. This is actually a two-part consideration.  In addition to the requirement for effective due diligence, scholars have also pointed out issues surrounding effective integration in the area of human capital.  The accounting rules give human capital no formal recognition on the balance sheet.  (One could argue that in an M&A scenario, human capital will get some recognition via the recognition of the intangible asset, Goodwill.)  If we embrace the credo that people are a company’s most important asset (and not carbon paper, as once suggested in a Dilbert cartoon), the effectiveness with which the HR issues are handled post-acquisition will be the evidence for the combined organization and the public at-large that we are true to that assertion. I have said for a while there are more good strategies around than there have been solid executions of those    strategies.  As I suggested above, the purpose of doing a deal is to add or create value.  I have used a three-legged stool of value creation as having: a passable (not necessarily perfect) strategy; a team with the appropriate talents (this team will change over time – either by expanding their skill sets, or by bringing in additional required skill sets); and a passion for execution (using solid analytics and measures that are applied in a disciplined manner.  As Vince Lombardi, a former head coach of both Green Bay and Washington professional football teams, has been quoted as saying, “If you are not keeping score, you’re just practicing.”)

10. View your advisors as resources and assets, not costs.  Yes, this appears self-serving.  You are intelligent.  So are your board and management team.  You have been successful in building a business and organization.  Even if you are that proverbial “rock star,” reflect for a moment on the failure rate above.  There are consultants and advisors that have seen many transactions from many perspectives.  Is it worth avoiding company with the majority to utilize those trusted advisors as insurance supporting a good outcome?  I submit to you the answer is “Yes.” 

The fact that everything old is new again provides a great opportunity to learn from history, and to re-write it versus merely joining the ranks of those who repeat it.  Good luck!

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