Does the nonprofit sector need M&A?
By Surbhi Bharadwaj (‘24 Strategy Fellow)
Last year saw over 40,000 private merger and acquisition (M&A) deals globally – and after accounting for small businesses, the number is actually orders of magnitude higher. M&A is the lifeblood of modern capitalism, providing businesses with the mutability needed to exploit synergies, widen their reach, and expand (or, in its worst forms, exploit) their market power.
Yet one would be hard pressed to find examples of nonprofit mergers. In fact, it’s common to find several nonprofits working on the same or proximate issues, even when merging into a larger entity could yield greater impact. Just like businesses, nonprofits can benefit from economies of scale, acquiring innovations, and diversifying their operations – and these improvements could enhance nonprofits’ impact. While there is some recognition that M&A (or “mergers and collaborations”) is applicable to the nonprofit sector, it is typically seen as a last-resort response to financial instability or high operational costs, rather than how the private sector sees it: as an opportunity for increasing value.
Given the scope for increased impact and synergies, this blog explores why so few well-performing nonprofits merge and makes the case for why and where it should happen more – highlighting how key stakeholders, including funder-doers like The Agency Fund, can play a key role.
Why nonprofit M&As are so rare
Three connected factors contribute to the infrequency of nonprofit mergers:
● Nonprofits can’t use revenue or profits to signal their value: Corporate M&A is built on the monetary valuation of companies via stock markets, revenue streams, and profit generation. Without the profit motive, nonprofits lack a similar ‘bottom line’ to objectively assess their value. Donations and funds raised can give us some clues, but the market for donors is far from perfect and giving can often be driven more by donor preferences than nonprofit impact.
● It’s hard to compare nonprofits, due to varying definitions and metrics of impact: Even seemingly straightforward metrics like scale can be hard to compare. How does a nonprofit providing one-time deworming pills to a hundred thousand children compare to a nonprofit offering daily care to ten thousand children?
● The nonprofit sector often lacks the collaborative ethos and commitment to maximizing value/impact on which mergers rely: Absent signals like revenue or profits, nonprofit mergers must rely on mutual collaboration – which can be difficult when organizations are persona-driven. Since nonprofits tied to someone’s ‘personal brand’ can succumb to ‘ownership syndrome,’ making it hard to think objectively about scale and impact, it’s unsurprising that successful nonprofit mergers are often founded on strong prior relationships.
Of course, the infrequency of nonprofit M&A is also mutually reinforcing: even well-meaning leaders may be deterred by the lack of examples, such that ‘merging’ may not even be considered as part of the solution set.
Where it’s been done, and where there’s a need
In recent years, experts have increasingly highlighted the potential value of nonprofit M&A (see here and here, for instance). But what does nonprofit M&A even look like? While rare, there are some notable successes.
In 2020, for example, two progressive US nonprofits – Swing Left and Flippable – merged, as described by their investor-grantmaker, NewMediaVentures. Both nonprofits were founded after the 2016 US presidential elections to generate support for Democratic candidates. At first, Swing Left focused on grassroots fundraising and volunteering, while Flippable provided data analytics to target under-resourced but ‘flippable’ districts. With the 2018 midterm elections, both organizations started expanding their reach and the synergies between their work became obvious. According to NewMediaVentures: “As the 2020 elections approached, it became harder to justify having so much duplicate infrastructure when the organizations shared such similar goals and brought such complementary strengths. So the founders decided to merge.”
Across today’s highly fragmented and crowded nonprofit sector, there are countless examples of similar overlap. Many of these areas present opportunities that are ripe for collaboration and potential merging.
Take India’s education technology sector. There is an abundance of ed-tech organizations in the country, each focused on different age groups, geographies, or facets of education – from supplementary at-home learning to core classroom teaching aids. While each organization targets different markets and products, they often end up interfacing with the same set of actors in local education administration, and the responsibility of sorting, prioritizing, and integrating these offerings falls on the already time- and resource-constrained administrators. Thoughtful mergers in ed tech could enable organizations to offer services and interventions that evolve with students as they grow up, or to ensure that at-home learning is tightly complementary to classroom education. For instance, a tech-based platform could expand its reach by collaborating with an organization supported by extensive ground staff and touchpoints with students.
How can we facilitate more impactful mergers?
Impact-oriented organizations should be focused on serving their communities, not prolonging their own institutional lifespan. ‘Strategic alliances’ to enable this can take on a range of forms, with mergers being one extreme variation; but it's critical that they happen. The nonprofit sector doesn’t have to abide by capitalist competitive dynamics and individualistic glory-seeking – and it shouldn’t. Instead, nonprofits can selectively borrow the private sector's approach to M&A in ways that broaden and maximize their collective impact.
Ecosystem facilitators like grantmakers, researchers, and consultants are uniquely situated to identify potential synergies, facilitate connections, and foster a culture that celebrates mergers as a means to increase impact instead of denigrating them as signs of failure. They can further support the tactical, long-term work required to make such mergers a success, from leadership transitions to organizational restructuring.
As a funder-doer, The Agency Fund is constantly on the lookout for opportunities for such organizational improvement. We have partnered with our grantee organizations to set up technical systems for data management, innovate on cutting-edge applications, and strategize with organizations to scale their operations. We have also seen several of our grantees form consortiums for the purposes of collaborative proposal-writing or advocacy. Healthy, agentic networks of organizations are better positioned to serve their beneficiaries. The Agency Fund supports all its grantees in increasing their organizational agency – and that of their recipients. We have not yet encountered an opportunity to support a grantee merger or acquisition, but are committed to objectively considering and supporting such a process if it increases our impact.
I have worked in the NGO sector for the majority of my career: as a donor, as an NGO leader, and as a consultant. While I have certainly seen unnecessary competition among NGOs, there is also extraordinary horizontal collaboration and coordination efforts among groups with shared objectives. The idea that M&A should be applied to civic space contradicts the notion that local knowledge and grassroots are the heart of civil society. This article fails to acknowledge the contours of civic space and the legitimacy of local expression that would be lost through prioritizing the scaling priority of M&A. A critique that would point to specific areas where horizontal collaboration would be more helpful is certainly welcome, but in my view, it is often large NGOs that lack the agility to problem-solve and respond quickly. And the wieldy overheads of large NGOs create distortions in civic space.
Having done both for-profit and nonprofit M&A, I can agree with the dynamics listed in the post. I would go even further: there are reasonably strong disincentives in the nonprofit sector that inhibit M&A. When you sell/merge a for-profit company (that is doing well), the management team and the board make money. The combined companies can usually become more profitable through cost-cutting.
When you merge a nonprofit entity, some of the leaders will lose their jobs and the others: they get to keep them but with more work (and maybe a little more pay). Since most significant fund-raising is personal, losing those leaders may end up reducing the funding, which may offset the painful process of obtaining cost efficiencies. Lastly, I would describe many nonprofit acquisitions as "assumption of liabilities" deals. If you take over an org and its programs, you are taking over the commitment to pay that staff and deliver those services. It's rare that a new nonprofit acquisition is cash-flow positive: it's just more money to find.
Given these headwinds, it's noteworthy when nonprofit mergers actually do happen, where the strategic opportunities justify the effort.