The ongoing pandemic and economic uncertainty have led nonprofit executives to create contingency plans in creative and unprecedented ways, including strategic partnerships. The sector should build on these dynamics and mainstream merger and acquisition planning as a key tool for scaling the impact rather than a hasty desperate measure.
David Weiss, CEO of the international non-profit Global Communities, wanted to increase the impact through a merger. In 2019 he began promising partnership talks with Project Concern International (PCI). In an interview with the Center for Global Development, Weiss described the positive atmosphere: “Our merger made sense because we found the right partner, the organizations shared values as well as complementary fields of expertise and geographical footprints.”
Then the pandemic struck and threatened the deal.
However, with many INGOs still on their heels with the escalating crisis in April 2020, Global Communities and PCI have completed and announced the merger. “The most important factor was that both organizations came together from strong positions. Neither of us was looking for a lifeline. “
Because of their strong respective positions, they were able to focus on how the combined organization could better serve the needs of the beneficiaries than on balance sheets. Conscious planning and a strong thesis for a greater impact together led to the merger reasons becoming more compelling after the Covid impact.
In the past year, NGOs like Global Communities have seen unprecedented upheaval in basic operating models. Even if many organizations are optimistic about a world after COVID, the impending challenges of climate change and increasing social inequality signal other impending shocks, among other challenges. Going forward, nonprofit executives and board members operating in global contexts and sectors will need to be more conscious of the role of mergers and acquisitions in both their strategic planning and contingency preparation.
At Dalberg, we have seen in our project work that many NGOs have elaborate plans to deal with unexpected events, but these plans rarely include options on how to merge, acquire, or form deep partnerships with another organization. In fact, the issue of mergers and acquisitions scares most leadership teams. As a result, boards of directors are often reluctant to even discuss mergers until their operational runway is too short and the company’s value proposition is severely compromised. Ambivalence becomes self-fulfilling prophecy – waiting too long to explore options means there are none left.
Not a panacea
Barney Tallack, former director of strategy at Oxfam International, describes three options for INGOs from the global north facing accelerated financial challenges after COVID: transform, die well, or die badly. Formal partnerships, when planned in advance, as in the case of global communities and PCI, can enable transformation, scaling, and resilience to challenges. Likewise, M&A can also be a method to die for good – that is, ensuring that people, programs, and assets are turned over to a new organizational steward.
Of course, there have been many pitfalls and disappointing results in the M&A experience of international NGOs. High up-front costs, poor complementarity in field programs, and cultural conflicts are real risks. For example, the late-stage merger talks between Oxfam Ireland and Goal failed after disagreements over the combination of programs. To prevent these outcomes, executives, and especially boards of directors, need to have a clear understanding of what to expect from a partnership and what structure can best achieve this. They should also clearly understand the value their organization brings to beneficiaries and the service provider ecosystem.
While financial hardship can determine the urgency of merging with another organization, it should not be the reason.
In short, boards with existing plans can view M&A strategically rather than reactively. Specifically, the management should consider three threshold criteria:
- Mission reinforcement. Are there clear structure and capacity options to better fulfill the partner-oriented mission through the joint organization?
- Cultural compatibility. Is there a coordination between the management teams and the employee cultures that enable the merger to run smoothly?
- Company sustainability. Is there a clear long-term business case for the collaboration?
These ratings can also help identify the nature of the collaboration. The first two criteria can often be met in structures that are not full mergers, such as: B. Selective asset transfers or the establishment of a joint venture. The realization of the third, however, requires a sober assessment of the extent of the financial challenges. For example, the hard truth for many NGOs surviving a crisis is that takeover by a larger organization may be the only viable option. A maxim of Private M&A: The combination of two small, financially weak companies creates only one larger, financially weak company.
In general, the civil society ecosystem would benefit from removing the stigma of M&A. Mainstreaming M&A planning should be on the agenda of all stakeholders, including NGOs, funders, governments and local organizations.
For organizational management, especially board members:
- Develop a dynamic partnership strategy … especially if you hope not to use it. Mergers and other formal partnerships (e.g. joint ventures, asset transfers) can take 6-18 months after an agreement is signed – a difficult milestone in itself! The risks of speeding up the process are high – from losing employees to alienating donors. A good contingency plan clearly defines an organization’s value proposition to the marketplace and creates a contact plan for potential partners. It also outlines the indicators that should be used in deciding whether to activate the plan.
- See your company’s response to COVID and future crises with a look at dynamic partnerships. The leadership team of each organization has spent the past year grappling with how to adapt their model to the crisis, but many haven’t thought about how expanding or combining skills with another organization can create new opportunities. For NGOs responding to the direct and indirect effects of COVID, as well as those whose focus has moved away from their sector, a strategically planned merger or acquisition can evolve your mission and remain relevant.
For donors and ecosystem actors:
- Encourage discussions and forums to highlight the potential benefits of mergers and explore best practices as you acknowledge the risks. One fear associated with growing nonprofit M&A is that smaller organizations will be wrenched away from large players and lose localized programs and relationships. Likewise, many corporate boards of directors fear that mergers will be a resource-intensive distraction or, worse, a mission distraction. These concerns are all valid, but neither are they the whole story. Creating a healthy industry best practice discussion is an important first step in reducing risk. In addition, the forum can also be a platform for the participants to identify potential partners.
- Create a communication channel to ensure the continuity of effective programming when the fellow can no longer support it. Breaking up or downsizing is difficult for any organization. In the for-profit sector, shareholders are incentivized to force this type of settlement. This is usually not the case with non-profit organizations. Talking about donors is often the last resort for fear that it could damage or even end the relationship. Funders should work to mitigate this communication breakdown by building better early warning channels. This may include, for example, setting up processes whereby fellows can raise concerns outside of their fellowship officer. Funders and fellows can then solve problems together, for example by calling in other portfolio members for support.
- Structure funding to fuel and support successful consolidation and build on a clearing house model. As financiers work to adapt to a changing world, setting up a new M&A Support Fund is a big impact opportunity and a potential differentiator in the field. Initiatives are already emerging that are working with non-profit organizations in the US to close this gap in the ecosystem, most notably the Sustained Collaboration Network. One idea is that a new fund could help organizations that are either on the front lines of an escalating crisis response (like COVID-19) and need a formal partnership to scale, or operators of essential services whose business model is disrupted by a widespread disruption became shock. A funding platform can help give businesses the opportunity to engage in the difficult discussion and discovery process required to make a strategic change.
For funders and ecosystem actors, helping fellows to survive and meet the incredible needs of current and future crises includes partnerships, mergers and collaborations of all kinds. The risk reduction and de-stigmatization of the process could have an incredible impact on better care for the population Have beneficiaries.
The way forward
In addition to choosing a manager, the decision to merge or acquire is the most important decision a board of directors can make. There are countless obstacles and misaligned incentives that stand in the way of being successful. However, at a time of internal or external crisis, a ready-made plan of formal collaboration, including M&A, could make all the difference in maintaining or even scaling the mission. As with most things, the smartest plan for M&A is to have one.
Jeff Berger is Associate Partner, Co-Head of Dalberg’s Latin America Region, and Head of the firm’s climate and environmental practice. Noah Elbot is a Senior Consultant at Dalberg.