Not-for-profits feeling M&A pressure in times of recession

Linda Le, Market Analyst

During times of financial crisis, not-for-profit organisations feel increasing pressure to merge with other, similar organisations. The idea is that mergers can make charities more cost effective and enable them to better serve the community. This is because mergers involve pooling existing resources, management and staff to form a single entity. The Community Council for Australia and other peak bodies have also been calling on charities to consider merging to reduce competition for funding. Further to this, merging would also introduce economies of scale and improve effectiveness. This blog piece will explore non-profit mergers and why they happen.

How often do not-for-profit mergers happen?

There is a view that mergers are more common in for-profit organisations than in not-for-profit situations. Not-for-profit mergers are not as well-publicised and less frequent. However, the Australian Institute of Company Directors’ 2019 NFP Governance and Performance Study found that there was decreasing M&A appetite amongst not-for-profits, with only 5% of surveyed directors reporting that they were undertaking a merger, and 30% reporting that they had discussed a merger, compared to 38% in 2017.

However, not-for-profit mergers do still happen. Indeed, there are a few notable examples of mergers from recent history. On 1 July 2015, Good Beginnings Australia and Save the Children Australia merged to create one of the nation’s largest and most respected organisations dedicated towards supporting disadvantaged Australian children through early childhood programs. The move was widely celebrated as one that would increase the organisations’ impact and cement their position as a leading advocate for disadvantaged children working towards their shared ambition of ensuring that all Australian children are ‘school ready’ when they start school. Joining forces in this way marked a new shared chapter for these organisations.

This was so successful that not even two years later, Save the Children Australia announced its intention to merge with Hands on Learning Australia to prevent disadvantaged children from dropping out of school. Save the Children also merged with the charity digital library service Library for All earlier this year.

Are not-for-profit mergers more common during times of economic turbulence?

In Australia, there are approximately 56,000 registered charities and this number grows at a rate of almost 4% per year. These charities provide aid on a broad cross-section of issues including health, education and human rights; they also provide support both within Australia and internationally. However, around 70% of Australia’s registered charities are actually small organisations with an annual revenue of less than $250,000 and operations in only one state. There is currently no upper limit on how many charities can be created and registered in Australia.

During economic booms, this diversity in the not-for-profit sector is celebrated because it fosters new interests, finds much needed gaps in the system and inspires the creation of innovative new programs and charities to fill these gaps. This diversity is fostered by the wealth of charity grants, gifts, and donations that are more readily available in the midst of economic booms.

However, during downturns, this money is not as readily available to charities as donors become more conscious of their spending. Without these cash infusions from third-party donors, not-for-profits, many of whom are reliant on donors, will often find themselves at risk of failure. In this way, economic downturns like the one currently being observed in Australia may prompt more organisations to consider merging to continue meeting community needs.

Why would a not-for-profit merge?

There are a number of reasons why a not-for-profit would consider merging. The Australian Institute of Company Directors’ 2019 NFP Governance and Performance Study found that the three predominant reasons behind why a not-for-profit would merge are to: better meet their mission, to broaden their range of services to existing users and to develop or maintain market share. Interestingly, one of the less-cited reasons for merging identified by the Australian Institute of Company Directors’ 2019 NFP Governance and Performance Study was that the organisation was not financially sustainable.

A common misconception actually is that mergers themselves generate revenue or reduce expenses; this is not necessarily always true. In the short term, the opposite is actually true because the once-off consolidation and transactional costs involved with merging can be fairly significant.

Even in the long-term, merging might not actually lead to substantial cost savings. Not-for-profit mergers involve combining two otherwise separate organisations into one; this involves rolling together annual audits, insurance programs and combining the charities’ administrative functions. This oftentimes leads to an organisation that is bigger, more complex and requires more and better management; in this way, merging might actually increase the administrative cost of running the charities.

Indeed, “cost savings” observed after mergers can often be attributed to improvements in organisational structure and not the merger itself. Merging often involves reflecting upon the successes and failures of the organisation, and it can open the door to management making tough decisions to cement the combined organisation’s financial standing, like instituting layoffs, launching new fundraising and media campaigns, and renegotiating key contracts.

In times of recession, NFP merger activity and intentions can increase as organisations look to their future and how they can continue to meet community needs in the broader context of economic turbulence. Doing so can serve to facilitate their longevity and cement their status as a leading organisation.

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