Volume 10; No. 4; Fall 1998
Mergers & Acquisitions in the Nonprofit World
By John Trauth and Kathy Kenny, Community Development Consultants
One cant pick up a newspaper these days without reading about the latest
bank mega-merger or acquisition. Fierce with competition for bank customers,
financial institutions constantly seek ways to expand product lines while
creating efficiencies that result in cost-savings to the institution. Recent
years demonstrate that merger deals can be smart and strategic moves in
the game of market share and long-term corporate survival.
Executive directors of community-based nonprofits understand better than
anybody the challenge of doing more with less. For years, local grass-roots
organizations have been at the core of successful community development
initiatives, and this will likely continue into the future. However, as
we will learn from the following article, mergers in the nonprofit world
are beginning to occur with greater frequency. While a merger deal may
not be on the immediate horizon, its benefits in the longer term may make
it a business strategy worthy of consideration.
Banking, commercial real estate, the insurance industry. . .you name
it. Mergers and acquisitions (M&As) have become the hottest business trend
of the Æ90s. The persistent bull market and steady rise in stock prices
has fueled much of the merger-mania experienced during the last several
years. In fact, M&As are one of the key growth strategies for companies
in the private sector seeking to expand their markets and influence.
One of the obvious advantages of a private-sector merger is increased
shareholder return. Less obvious, however, are other significant benefits
that contribute to a companys bottom line; well discuss some of them
later in this article. And, while M&As may seem applicable only to the
private sector, many of the same advantages exist for their counterparts
in the nonprofit world.
In the private sector, merging with or acquiring another company can
make dollars and sense for a number of reasons:
1) Most M&A deals are paid for with shares of stock from the acquiring
or surviving company; the higher its stock price, the more capital the
company has to fund the purchase of other companies.
2) Company products and/or markets may be complementary or supplementary,
thereby suggesting that the combined companies could fit well together.
In such cases, the new whole might be viewed as greater than the sum
of the original parts. If this is the marketplace perception, then the
share price of the new company would likely increase, creating additional
capital for future expansion.
3) The new company might also be better positioned to serve an expanded
market, which is particularly important in highly competitive and fast-growing
4) Significant cost savings might be created through the elimination
of duplicative overhead and support services (accounting and back-room
operations, for example), overlapping store, branch or service-delivery
locations, and the reduction of personnel at various levels of the corporate
5) All of the aforementioned activities could result in increased efficiencies
and an enhanced ability to market the companys products.
Combined as elements of a long-term business strategy, these considerations
are solid reasons for a private enterprise to consider a merger proposal.
They are also critical factors in the financial and organizational survival
of nonprofit entities as well.
Differences undoubtedly exist between the structure and operation of
private-sector businesses and nonprofit organizations, particularly the
manner in which each generates capital. Unlike corporate capital generated
from stock proceeds, nonprofit capital is generated from philanthropic
sources, public sector contributions, service delivery revenue and/or
member contributions. However, this doesnt alter the fact that nonprofits
are also businesses and, as such, can benefit greatly from astute business
decisions which may include a potential M&A with another nonprofit organization.
If the missions and visions of two nonprofits are complementary, the
combination of the two could create a new and improved organization that
enjoys greater cost efficiencies and long-term potential. Furthermore,
potential funders would likely be more inclined to participate in an organization
that is perceived to be larger, more cost efficient, and ultimately, more
A Case In Point
The following is the story of two Neighborhood Housing Service (NHS)
programs that served two low-income neighborhoods in Orange County. In
late 1997 and 1998, the authors (hereafter we) helped facilitate the
merger of these two NHS programs that will now serve all of Orange County.
This case study illustrates many of the advantages of M&A activity outlined
For nearly 20 years, there have been two NHS programs in Orange County,
home to more than 2 1/2 million people. The La Habra NHS and Santa Ana
NHS were both formed in the late 1970s. They share similar origins, including
a common connection with the same national intermediary, Neighborhood
Reinvestment (NR). Both served predominately low-income Latino neighborhoods
within a large, affluent, and politically conservative county.
Even with such striking similarities, the two programs differed in fundamental
ways. The La Habra program enjoyed continuous organizational and financial
stability since its founding, including an executive director with a 17-year
tenure. The Santa Ana program, while strongly supported by neighborhood
residents, suffered organizational and financial setbacks, difficulty
in delivering program services, and problems in retaining an executive
director. Beginning in June 1996, the La Habra executive director and
other staff were hired under contract by Santa Ana to provide temporary
leadership until a permanent solution could be found. Organizational assessments
conducted by Neighborhood Reinvestment ultimately determined that the
Santa Ana program was not financially viable in the long term.
In December 1997, we were engaged by La Habra NHS to help determine the
optimal relationship between the two NHS programs and to explore ideas
for resolving the situation. After a series of meetings with representatives
of both organizations, we found that Board members and staff alike were
anxious for a solution. But they were also concerned that a merger of
the two organizations would dilute the benefits of local programs, leavning
partnerships between residents, government and businesses diminished.
Furthermore, Board members from La Habra NHS had grave concerns about
the financial liability of consolidating. Their counterparts in Santa
Ana were apprehensive about becoming a step child of the stronger La
Externally, there was strong support for a countywide organization that
could help revitalize a variety of low-and moderate-income neighborhoods
by working with local residents, businesses, and the public sector. In
contrast to neighboring Los Angeles County, there were relatively few
organizations addressing affordable housing and community development
needs within Orange County. Funders were enthusiastic about the possibility
of reaching the lower-income communities in the County, including Santa
Ana and surrounding cities.
Based on this research, our recommendation to both Boards was to create
a new, countywide NHS by merging the two organizations, and slowly expand
its programs into new communities as funds became available. Like mergers
and acquisitions in the private sector, this one made sense for several
- the mission, products and markets of the two NHS programs were complementary
- both Boards and their respective staffs shared similar values, orientation
and experiences through their connection to Neighborhood Reinvestment;
- a countywide NHS would be positioned to serve the unmet community
revitalization and affordable housing needs of a larger market;
- significant cost savings would be created through the elimination
of duplicative overhead and support services (administration, fundraising,
accounting, program staff); and
- resources to support such an effort seemed available.
The key challenge was how to create a new, countywide program while preserving
the existing programs and local presence of the two original organizations.
Neighborhood Reinvestment recognized the potential for M&A replication
elsewhere in its network of more than 170 affiliates, and was strongly
supportive of the planning effort. In addition to providing financial
assistance for our study, NR staff participated in key meetings and retreats
throughout the process.
The Fannie Mae Foundation funded a large portion of the planning effort.
Other corporate sponsors such as the Enterprise Foundation, Wells Fargo,
and Bank of America supported the merger effort based on NHS excellent
track record and reputation in the community.
The Planning Process
The next step involved the creation of a countywide Task Force to plan
for the expanded organization. With the help of NHS staff, a 21-member
Task Force was recruited that included members of both Boards, representatives
of other Orange County housing programs, potential funders, and participating
jurisdictions. Neighborhood Reinvestment staff attended all meetings and
served in an ex-officio advisory capacity.
The purpose of the Task Force was to create a detailed plan for the expanded
organization, including resolution of the issues identified by both organizations.
After review, the plan would be submitted to both Boards and the members
of each organization for approval. Some of the issues addressed were:
- the mission and vision for the expanded organization;
- the governance structure of the new organization, including composition
of a new Board of Directors and Advisory Committee;
- necessary staffing and facilities;
- budgets for the initial year(s) of operation as a combined and expanded
- an identification of potential funding sources and a fundraising plan;
- a determination of the initial housing programs which would be offered;
- a marketing and outreach plan for the new organization; and,
- other details of the transition process, including a timetable for
Legal counsel was provided by Orrick, Herrington & Sutcliffe, a San Francisco-based
firm under contract with La Habra NHS. The attorneys worked closely with
us throughout the merger process, providing legal guidance on organizational
options and preparation of required legal documents.
The merger was completed in August 1998 following the presentation of
Task Force recommendations to both Boards of Directors and members of
La Habra and Santa Ana NHS organizations. In September 1998, Neighborhood
Housing Services of Orange County, Inc. (NHS OC) became a reality.
With its new mission and vision, the Board of Directors and staff are
genuinely excited about the possibilities that lie ahead. There is a new
21-member Board of Directors comprised of representatives of the La Habra
and Santa Ana programs and a number of new members. In addition, there
are two Advisory Boards representing chapters and overseeing local programs
in the two original communities. As new communities are added, Advisory
Boards and chapters will be created to retain the neighborhood planning
and oversight function that makes the NHS model so strong.
Program expansion will begin with the creation of a Homeownership Center
which will serve low-and moderate-income clients from all over Orange
County. In addition to its existing facilities, NHS OC will locate its
administrative and program staff, as well as the Homeownership Center
in a new facility that is centrally located in the County. A two-year
budget has been prepared, along with a fundraising plan campaign which
has already begun to raise money from lending institutions, foundations
and other funders.
Through a careful examination of the issues, members of two local NHS
programs were able to look beyond their immediate horizons and see the
greater potential presented by a larger and more comprehensive program.
NHS OC has been carefully structured to retain the present program strengths
while expanding to serve more neighborhoods and people in need. Other
non-profit organizations may learn from the NHS OC experience, and are
welcome to consider it as a model for replication.CI
Considering a Merger Deal?
If so, ask yourself these key questions:
- Are our missions similar, and do our activities significantly
complement or supplement each other?
- Can the market for our services be better served by a larger
- What cost savings can be anticipated from the potential combination
of two organizations?
- Can we make the case to both our respective Board members and
our funders that this makes sense? Will they be supportive?
- In the final analysis, do the potential advantages of a merger
and acquisition significantly outweigh the disadvantages?
For additional information on the NHS OC merger or other community
development initiatives, please contact Kathy Kenny at (415) 826-2547
or John Trauth at (415) 332-4346.
About the Authors
||John R. Trauth
has been working in the affordable housing field since 1972;
Kathy Kenny has over 15 years experience in community development,
affordable housing and program design. For over 10 years, they were
the team responsible for many of the nationally recognized programs
of the Development Fund, a nonprofit organization dedicated to the
development of innovative financing programs for community development.
Working closely with the Federal Reserve Bank of San Francisco,
they helped create financing programs for community reinvestment
in seven states totaling $650 million, including the California
Community Reinvestment Corporation (CCRC), the California Economic
Development Lending Initiative (CEDLI), and California Resources
and Training (CARAT). As consultants, they have developed affordable
housing strategies for cities and have jointly conducted numerous
strategic planning efforts and organizational start-ups. John Trauth
was instrumental in the creation of BRIDGE Housing Corporation and
Southern California Housing Development Corporation, two highly
successful nonprofit housing development corporations. Kathy Kenny
currently serves as a planning consultant to the Council on Foundations,
several California foundations, nonprofit community development
organizations, and the Federal Reserve Bank of San Francisco.