Economic Slump Likely to Mean M&A Surge among Nonprofits

BOSTON, Feb. 26, 2009 — A Bridgespan Group poll of nonprofit executive directors found 20% of 117 respondents stated that mergers could play a role in how they responded to the economic downturn. This finding dovetails with Bridgespan’s new, far-reaching study of more than 3300 nonprofit deals across four states over 11 years. The longitudinal research finds nonprofit merger and acquisition activity occurring at the same rate in the nonprofit sector as in the for profit sector, but with a heavy skew to small deals born of financial distress or leadership vacuums. Few nonprofits pursue mergers for longer-term strategic goals and mergers involving large nonprofits happen at just one tenth the rate of such deals in the corporate sector, a watch out as nonprofits turn to mergers in tough times.

The 11-year study conducted by The Bridgespan Group, a nonprofit advisor to other nonprofits and philanthropy, evaluated merger filings in Massachusetts, Florida, Arizona and North Carolina and found that the cumulative merger rate for nonprofits, 1.5 percent (calculated by dividing the number of deals by the total number of registered organizations), was nearly as high as the 1.7 percent rate for for-profit companies. In terms of success rates, the study identified three nonprofit sector “market characteristics” that are instrumental to favorable M&A activity:

* Large number of nonprofits with many small players – fragmented by geography and types of services offered
* High degree of competitive pressure – defined by variable and measureable performance in services offered
* Barriers present for organic growth – including sectors that are asset intensive, serving in areas where a local brand is critical, operating in a saturated market or a highly regulated environment

“If economic conditions continue to deteriorate, more and more nonprofit leaders will likely consider the M&A option,” said William Foster, a partner with The Bridgespan Group and co-author of the study: Nonprofit M&A: More Than a Tool for Tough Times. “But our study shows that there has never been a lack of nonprofits considering M&A when under financial distress. The real gap is in the more stable nonprofits using it as tool to increase impact.”