Mergers that make sense – Nonprofit groups join forces as funding becomes scarce

Four years ago, the head of the Women’s Foundation in San Francisco approached her counterpart in Los Angeles with an intriguing idea.

Todd Wallack, San Francisco Chronicle Staff Writer

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/03/31/BUG005TSJD1.DTL

Instead of operating separately in different corners of the state, why not combine forces and serve all of California? After all, the foundation in Northern California was increasingly eager to move beyond local issues and work on improving statewide policies affecting girls and women.

At first, the Los Angeles Women’s Foundation, which had its own expansion plans, politely refused. But when its fund raising started to falter — forcing it to trim its staff and grants — it decided a merger made sense after all. The groups sealed the deal in August, forming the Women’s Foundation of California.

"The propelling reason was the financial reality,” said Patty Murar, the former president of the Los Angeles foundation who is now vice president of the new organization. "We wanted to sustain (our) work."

Across the Bay Area and the country, the sluggish economy is nudging nonprofit groups to consider merging or forming alliances to become more efficient and ride out the downturn, experts say.

"We have noticed an increase in interest from organizations (in merging), said Bob Harrington, director of consulting for La Piana Associates, a nonprofit consultancy in Oakland known for its merger work.

Indeed, many charitable foundations and nonprofit leaders have actively been encouraging nonprofits to combine forces. Many cite the increased competition for donations and foundation grants as a result of the explosion of nonprofit groups over the past decade. During the past six years alone, the number of public charities registered with the IRS has soared 40 percent.

"The dire economic situation has caused a lot of organizations to go out of business,” said Mark Walker, chief executive of the United Way Silicon Valley. "We don’t see the nonprofit climate improving, and we think it is an appropriate response to encourage the nonprofit sector" to consolidate.

Agency aids with mergers

The United Way and the Community Foundation Silicon Valley, for instance, recently teamed with some other philanthropists to form the $215,000 Silicon Valley Nonprofit Strategic Restructuring Fund to aid nonprofit agencies in Santa Clara County interested in considering a merger or similar partnership.

The East Bay Community Foundation and other foundations have already made grants to nonprofit organizations to explore mergers and similar alliances. The topic has increasingly become a hot item among nonprofit executives at workshops and conferences, including the Independent Sector’s national conference in San Francisco in November. A workshop on nonprofit mergers in San Jose in December attracted 22 groups. For instance, Bridges and World Pulse, two Oakland organizations that train youth from low-income backgrounds to do community work through overseas trips, plan to merge by year-end. The groups have already worked together informally for years.

"There are a lot of nonprofits in the area and it’s become more and more important to collaborate instead of competing with each other,” said Viviana Rennella, executive director of Bridges.

But just as in the for-profit world, many nonprofit mergers fail.

In 2001, Jewish museums in San Francisco and Berkeley decided to combine forces as the Magnes Museum. But after a yearlong rocky marriage, in which board members were deeply divided over the direction of the organization and had trouble raising money for new buildings, board members decided to divorce in February 2003.

Many more potential mergers never get past the talking phase.

CompassPoint Nonprofit Services, a San Francisco nonprofit consultancy, recently considered merging with the Management Center, another San Francisco agency with a similar mission, but balked at taking on Management Center’s debt. The Management Center, which laid off much of its staff after a sharp drop in revenue, said it plans to announce a decision soon on whether it will merge with another organization or take other action to salvage its programs.

Separately, four Big Brothers Big Sisters organizations in the Bay Area tried to hammer out a merger a few years ago but couldn’t reach an agreement.

"It was bad timing,” said Gary Montrezza, executive director of Big Brothers Big Sisters in Santa Clara County.

But Montrezza said representatives of the agencies — in San Francisco, San Jose, Oakland, San Rafael — have recently revived the idea of combining forces. So far, the talks are informal and preliminary, but Montrezza said he believes they could have a different outcome this time.

"There’s no reason to have four separate silos,” Montrezza said. Still, experts say mergers aren’t always a solution for financially troubled organizations that are struggling to survive.

Costs go up at first

For one, mergers don’t always save money, at least not in the short run. Many experts and nonprofit groups say merging two organizations involves startup costs, including everything from hiring outside consultants to legal fees to replacing signs and brochures, which cash-strapped groups may not be able to afford. The women’s foundation merger, for instance, will likely cost $250,000, its CEO estimates.

"Organizations probably should not enter into a merger with the primary goal of saving money,” said Harrington, the consultant, who says the main benefits of merging include increased effectiveness and the ability to provide more comprehensive services.

"Some mergers will find savings — but it is highly dependent on the level of overlap in their administrative functions. Most nonprofits are fairly thinly staffed in administrative functions, so the savings may not be that great."

Worse, a merger process can soak up valuable time — doing everything from moving offices to combining computer and accounting systems — that could otherwise be used to raise money or serve the community.

"I’m skeptical of the rush to say this is the solution to cutbacks,” said Jeanne Labozetta, president of Family and Children Services in San Jose, the product of a merger of several organizations four years ago. "Merging two weak organizations doesn’t make a strong one."

And nonprofit mergers can be tricky. Unlike in the corporate world, nonprofit board members do not have a financial incentive to approve a merger. And many mergers break down because of cultural differences.

In fact, the Los Angeles Women’s Foundation resisted the idea of merging with its counterpart in Northern California partly because of pride in their own organization and ability to go it alone, staffers said.

But Murar said board members swallowed their pride when fund raising steadily declined — its annual revenue shrank from $2.7 million in fiscal year 2000 to about $804,000 in 2003, forcing it to slash its budget by more than half.

Finally, in December 2002, the chairwoman of the Los Angeles group, former Los Angeles Times Publisher Kathryn Downing, phoned her counterpart in San Francisco, Eunice Azzani, a managing director of executive recruiter Korn/Ferry International in San Francisco, to set up a meeting. In early 2003, Downing and another board member traveled to San Francisco, where Downing said she brought up the idea of merging again. Within months, both boards had approved the idea.

"The most important reason for the merger is that we share the same mission and values and believe we will have much greater strength as a statewide organization,” said Downing.

Positive response

Staffers and board members at the newly formed Women’s Foundation couldn’t be more positive about their merger so far.

For one, they benefited from the fact that the Los Angeles Women’s Foundation and the Women’s Foundation in San Francisco collaborated for years, even sharing similar bylaws. "We have always been sister funds,” said Patti Chang, president and CEO of the combined Women’s Foundation.

She and others tried hard to treat the combination as a merger of equals, despite the fact that the foundation in San Francisco was much larger and financially stronger than its counterpart in Los Angeles.

For instance, the two organizations created a transition board that included five representatives from each organization. And they created a new name and logo for the combined organization, instead of sticking with the old San Francisco name and insignia.

Now that the merger is done, Chang said, the combined organization can make a much bigger impact than either could alone. "We can envision much bigger and bolder strategies."
Mapping the mergers

— Bridges and World Pulse, both in Oakland, plan to merge by year-end.

— The Hawkins Center became part of Rubicon Programs in Richmond in July 2003.

— Live Oak Adult Day Services in San Jose merged with Cupertino Senior Day Services in July 2003 and retained the Live Oak name.

— The Women’s Foundation in San Francisco merged with the Los Angeles Women’s Foundation to form the Women’s Foundation of California in August 2003.

— Next Door Solutions to Domestic Violence merged with WATCH in San Jose in October 2003 and retained the Next Door name.

Source: Chronicle research
CHART:

Nonprofit growth

There has been a surge in the number of nonprofit groups, including public charities and other types of tax-exempt groups such as unions and lobbying groups:

Public charities registered with IRS

1992: 546,000

1997: 693,000

2002: 910,000

2003: 964,000

All nonprofit groups

1992: 1.42 million

1997: 1.59 million

2002: 1.78 million

2003: 1.83 million

Source: Independent Sector

E-mail Todd Wallack at [email protected].