This week Laura Richard, EVP and Managing Partner at TACK10 continues her series “Charity 2025 Insights” as she takes a deeper dive into the most controversial insight.
With the Paradigm Shift in full effect, the Charity 2025 Insight predicting a rise in the number of mergers and acquisitions within the charitable sector should come as no surprise. Whether out of necessity or a desire to better position an organization’s capability to deliver impact on the issue that it has been established to address, these mergers and acquisitions are an opportunity to create a foundation for Strategic Partnership Ecosystems.
Companies are bought, sold and amalgamated with relative frequency in the private sector in order to improve market position. Mergers and amalgamations as they are termed in the charitable sector are less common and there is limited research available regarding the motivations, approaches and outcomes of charitable sector mergers and amalgamations. There are a variety of underlying motivators which lead to mergers and acquisitions in the private sector, each with a parallel to the motivations that would spur on this type of activity in the charitable sector.
#1: Shared Value Creation
The consolidation of two businesses typically results in synergies that increase the wealth of shareholders. The premise is that the resulting value of the merged company exceeds the sum of the value of the respective pre-merged companies. There are two types of synergy at play:
Revenue Synergies: Primarily involving the company’s revenue generating abilities through attributes such as market expansion, product diversification, research & development activities, etc. For charities, a merger can improve its ability to generate revenue by opening new donor relationships and presenting a broader and potentially more compelling value proposition to donors.
Cost Synergies: Mergers generally result in economies of scale and access to improved processes/technologies which improve the overall cost structure of the merged entity. This is modeled in charity mergers as well, where efficiencies can be found through combining the processes, tools and assets of two independent organizations.
Mergers in the private sector can be motivated by a desire to diversify into new markets, launch new products or services that are related to the core offering. Diversification should be a strong motivator in the charitable sector as this could allow for new and related service offerings to the stakeholders served by a charity along with increased impact of a successful program or intervention into new markets.
#3: Acquisition of Assets
Access to assets that are unique or take a long time to develop such as owned technology is a strong motivation for corporate mergers. This type of competitive advantage fuels growth in a post merger environment as the emerging entity is able to leap-frog what may otherwise be years of development. Within a charitable sector that is resource constrained, accessing owned assets of another organization to enable broader or deeper social impact is a mechanism to increase the return on investment in those assets.
Other drivers of corporate mergers include improved financial position (increased total financial capacity that can be accessed through equity or debt markets), tax purposes and personal motivations for company executives who desire the prestige of leading larger organizations.
Mergers in the charitable sector occur with far less frequency than in the for-profit sector. In 2017, 2 in 1,000 for profit organizations merged or went through acquisition. Comparatively, 2 in 20,000 charities merged or amalgamated in 2017. Our prediction is this is set to change in the next 5 years for a number of reasons.
Right Sizing of the Sector: For a period, growth of the charitable sector outpaced GDP growth. The issue with this growth is that revenue growth from the sector’s three channels of revenue generation (government, individual/corporate donors, earned revenue) did not keep pace with the sector’s growth. As a result, the charitable sector as a whole is challenged to do more with less which is limiting its ability to innovate.
Leveraging Resources: Charities are under constant scrutiny regarding their administrative and fundraising costs as a percentage of total revenue. While we do not prescribe to the notion that low administrative and fundraising costs equates to a well run charitable organization, the efficiency that can be achieved through mergers of backend systems should be an attractive value proposition for charitable organizations.
Meeting Stakeholder Needs: We frequently see charitable organizations expanding their programming in order to meet stakeholder needs and donor desires. This expansion of programming can lead to increased duplicity in social purpose activities. Rather than building new programs independently, leveraging the strength of another organization’s expertise has the potential to not only deliver a superior product for a lower investment, it also has the potential to expand the impact of that new service through exposure to a larger population.
Donor Engagement: Changes in donor trends have resulted in charities facing greater competition among one another. A merger of charitable organizations creates the ability to not only access a larger donor pool but the opportunity to tell a bigger story of impact and outcomes to drive future donor dollars.
As government funders and donors have increased access to data, questions will continue regarding efficacy and impact of charitable contributions. Eliminating duplicity and ensuring that every single dollar committed to social, economical, cultural and environmental issues is optimized is the #1 reason we believe that ecosystems will form in the charitable sector. At a minimum organizations need to seek out opportunities to work together through formal strategic partnerships to deliver on stakeholder needs and donor interests. Charitable mergers will rise to solve for current pressures and to capitalize on the investments and expertise that drive innovation for the sector.