Mergers and acquisitions (M &A) often have a negative stigma attached to them in the nonprofit world; however, there are positive reasons to take this type of transaction. This blog post showcases the steps needed for a successful M&A process through a recent case study.
Kenny Roger’s The Gambler was not talking about mergers, acquisitions or divestitures. But he might as well have. Sometimes to succeed in your business you have to know when to walk away from certain activities. Walking away can be hard for any business since chances are that the business unit or assets that are being divested are assets and people in which you have been investing. It is particularly difficult for mission-oriented INGOs where what matters is not just money and bottom line performance, but also mission impact and values. Balancing the two concerns – mission-focus with bottom line orientation –sometimes takes you to unexpected places.
Take the recent divestiture action taken by the organization we represent, Plan International USA (Plan). On the face it, the divestiture seemed odd for two reasons: (a) we were transferring assets associated with a previous acquisition we had characterized as very successful (and assets that had been generating revenue); and (b) we were doing so in exchange for no money.
Let’s take a look at both these aspects.
The decision to divest
Mergers and acquisitions can be valuable for many reasons – from improving existing products or services, to a gateway to acquiring new clients/donors and talented staff. Yet a depressingly small number of such transactions deliver on their promises. One report by KPMG concluded that more than half of mergers destroy shareholder value while one third made no difference at all. As the KPMG report noted, “The reasons for failed mergers include tangible accounting and operation failures, but the most complex reasons deal with people, culture and human emotion.” It is worth noting that these metrics pertain to for-profit companies. It is also worth noting that not all experts agree with the assessment that failures are more common than successes in the M&A space. For example, mid-sized deals grab less press attention but have a much better track record.
Irrespective of what the pundits say, at Plan our experience with M&A (we have done two) has generally been positive – but not perfect. As was described in an earlier blog by one of the authors, the decision to merge with the Center for Development and Population Activities (CEDPA) in the fall of 2012 was driven by the desire in Plan to augment our capabilities in the gender space (in light of the then new campaign around girls education, Because I am a Girl) and the recognition by CEDPA that joining Plan would enable them to magnify the impact of their women’s empowerment tools and programs.
One of the initiatives that came with the CEDPA transaction was the WomenLead Institute (WLI). WLI was not the only initiative associated with the merger, but it was probably the best-known initiative and one that had been continuously delivered by CEDPA since the 1980s. WLI’s funding had waxed and waned since its birth at CEDPA, but the staff dedicated to the program had more or less covered their costs throughout the years. Yet by early 2018 it had become clear to Plan management that maintaining WLI was going to be difficult in the context of our new strategy focused on girls’ rights. You might think that a program that focuses on women’s leadership and economic empowerment is highly aligned to a strategy that is focused on girls’ rights and youth leadership. But you would be wrong. In part this has to do with the rather strange bifurcation that exists in the donor community. In general, donors focused on women’s empowerment are not donating to girls’ rights, and vice versa. It had become increasingly clear to us that our limited private fundraising capabilities would be stretched beyond ability if we asked them to do both. We had to choose.
This was not an easy decision. Letting go of WLI was politically sensitive. This was an initiative that was much respected and beloved by several of our board members (who themselves had come to Plan from CEDPA). To them, the WLI decision felt like a repudiation of the CEDPA mission. Equally, if not more important, our management team felt that it could not simply let an initiative like WLI disappear – an initiative with a 40-year track record of building the capacity of women NGO leaders and women leadership networks in countries around the world. How to preserve the value of this asset for our community?
The decision to invest in divestiture
This is why Plan settled on the idea of treating WLI like a formal divestiture. While management felt strongly that there was enormous value in the WLI assets, we recognize that the value would not be fully realized in Plan. We would seek to identify potential INGOs whose mission aligned well with the capabilities and qualifications that WLI had to offer. We created an information memorandum; a document that provided interested parties with the basic information about the WLI assets, its qualifications, staffing capabilities, cost structure and donor base. We set the divestiture to be a competition between seven entities which demonstrated interest in WLI and signed a nondisclosure agreement, which gave them access to the information memorandum. After reading the information memorandum, we asked those interested to submit an initial bid outlining why they thought they were the right organization to take over the asset. We also then set up 2-hour conversations between the bidders, Plan’s management team and WLI’s manager. After the interviews, the finalists were invited to submit their best and final offer. Counterpart International, a U.S.-based INGO focused on capacity building overseas, came out ahead and on January 2, 2019 they welcomed the WLI team.
It is worth noting that this entire process took a significant amount of senior management time at Plan and that no money/compensation was received in return from the winner. But we did it because it was the right thing to do for the donors who built WLI, for the staff and for the women NGO leaders that benefit from these programs. Destroying value as a result of a transaction need not be inevitable. But you have to be willing to recognize your own limitations and how value is created or destroyed.
Industry Challenge
There is relatively little research done on nonprofit mergers, and for a variety of reasons nonprofit mergers are less common (see for example this recent article on the topic). The expectation, however, is that such transactions will become more common given expected overall reductions in private and government giving. As more of these transactions go forward, it will be important for donor and INGO leadership to be mindful of the value creation and destruction that happens with these efforts. A bottom line orientation is essential to the survival and growth of our sector. But that bottom line can have many dimensions. As leaders in our sectors we must dare to think differently about what the bottom line looks like to different stakeholders, and to be looking for ways to support innovative efforts.