Growing political pressure and shrinking public resources are forcing nonprofit housing groups to merge with stronger organizations at a faster pace than ever before. While the move among nonprofit housing development corporations to consolidate is nothing new, mergers are different now than a decade or so ago.
During the 1990s, mergers within the affordable housing development sector typically occurred when weak organizations needed to be bailed out. Quite often the real estate assets of a struggling organization were the only thing preserved, and neither the staff nor the mission of the smaller organization was incorporated into the surviving entity. These bailouts occurred for a variety of reasons: over-reliance on developer fees, management issues, problematic real estate portfolios, declining political support, and changing priorities among governmental programs.
But a new era is dawning for mergers among nonprofit housing development corporations. Mature and established organizations are now merging to achieve strategic organizational objectives as well as to ensure their long-term sustainability.
Mergers have enabled nonprofit developers around the country to operate more efficiently, diversify funding sources and lines of business, garner more political and financial support, and ultimately, to build their financial strength.
Merger activity among nonprofit developers has entered a new phase, and some of the most mature organizations have undergone not just one but a series of mergers over the last 10 to 15 years in an effort to continue growing.
The fundamental reason for merging as a growth strategy is simple. “It’s harder for smaller groups to attract financial and political support,” said David La Piana, president of La Piana and Associates, a consultant to nonprofits and foundations. “One way to get to scale is to merge.”
Although there is no record of the number of mergers among affordable housing developers, consultants and national housing organizations agree that the affordable housing development sector is becoming increasingly consolidated. “We’ve seen a substantial increase [in merger activity] in the last three to four years across the country,” said Robert Burns, director of field operations for NeighborWorks, a national network of more than 230 members which provides financial support, technical assistance, and training for community-based revitalization efforts.
Starting in next month’s issue, Affordable Housing Finance will examine mergers at three different organizations to explore how the affordable housing development sector is restructuring and the implications of that organizational growth at the national, regional, and local levels for nonprofit developers and the communities they serve.
Even though every merger presents a unique set of circumstances and challenges, the merger process is similar for every organization, requiring patience, stamina, and a significant commitment of time and money.
According to a 2002 report by John Davis, Bridging the Organizational Divide: The Making of a Nonprofit Merger, there are four stages to every merger.
Incubation marks the stage where organizations express their interest in consolidating, and the pros and cons of the transaction are considered. Each party needs to identify what it is trying to get out of the merger and how the potential partner will help accomplish strategic goals. Some organizations get stuck in this phase for years before a decision is made, but the experts warn against dragging it out. “Start with a board resolution and a good faith commitment toward making a decision to merge or not,” said La Piana.
It may be appropriate to shelve pursuing a merger for a period of time, until support builds for the idea. Some organizations have come back together years after their initial discussions to execute a merger.
The second stage is exploration, which is a process of assessing the partner(s) and the potential for collaboration between the organizations. The parties conduct their mutual due diligence to identify and mitigate against legal and financial risks, and to develop strategies for accomplishing the desired outcomes of the merger.
Next, the groups begin negotiating. This involves planning the actual “marriage” of the two organizations, and creating a committee comprised of board and staff of each organization to achieve consensus about organizational structure and operations issues such as staffing, budget, and mission. Even if consultants aren’t hired during the exploration phase, the right consultant can be an important resource for facilitating decision-making and overcoming disagreements. The negotiation phase typically concludes with a report of recommendations and a board resolution for each organization to adopt them.
The final stage is implementation. This is when the merger is approved and the staff, board, and by-laws are all re-configured to reflect the creation of a new organization.
Despite similarities in process, mergers and acquisitions differ significantly in outcomes. “Merger makes sense if you’re trying to combine the political assets, leadership assets, and human assets,” said Sue Reynolds, executive director of Community HousingWorks in San Diego, which has undergone two mergers since the mid-1990s. “It takes substantial time to manage a merger. If you want to acquire an organization, and the political resources aren’t a strength that you want to capture, one organization can be assumed into another. That has efficiencies, but it doesn’t capture the human parts, capacity, and relationships that are one of the key assets that you want to combine when you merge.”
The human parts of a merger are also the most difficult to manage and can sometimes threaten to derail the process. “The number one roadblock is CEO sabotage,” said consultant La Piana, “As a result, the best time to take on a merger is when a CEO is exiting,” he said.
One of the most critical ingredients in a successful merger is the will of each organization’s leaders to see it through. “To do it successfully you need two leaders who are in lock step together … and they have to be viewed by the organization as being strong and united,” said Jane Graf, president of Mercy Housing California, a veteran of four mergers.
“Weakness on one side or the other, or a lack of harmony with people who are disgruntled will be used as a way to divide and conquer,” she said. “People aren’t evil – it’s human nature to start to break the union apart.”
Mergers are costly endeavors, with organizational consultants and attorneys involved in facilitating the negotiations and drafting the documents to establish the new entity. Nonprofit mergers cost typically somewhere between $30,000 and $70,000 for legal and organizational consulting. However, legal costs can escalate dramatically for nonprofit housing development organizations with multiple real estate partnerships, which is why the experts recommend that the parties agree to use the same attorney to conserve resources.
The merger process generally takes 12 to 18 months from incubation to the start of implementation, according to Burns at NeighborWorks. But the work of unifying disparate organizations into a cohesive new entity often requires years to complete. “You can’t pay enough attention to the culture thing,” said Reynolds. “Cultures don’t mix like they’re in a blender.” She recommends that newly-merged organizations give workers a short window of opportunity to choose to stay on, rather than dragging that process out.
After the merger is approved, the culture of one organization will almost always dominate, which may be uncomfortable for some board or staff members. “Not everyone is going to fit in the new organization and it is not critical that they do,” said Stan Keasling, senior vice president of Mercy Housing. “It’s unfortunate that it’s not the best thing for certain individuals, but it is the best thing for the organization.”
Despite these obstacles, mergers present a unique opportunity to achieve efficiencies of scale as well as to incorporate new lines of business, expand geographic presence, and deepen staff capacity. The best practices from the old organizations can be consciously selected and integrated into the operation of a new entity that benefits from the experience of more than one organization, one CEO, and one board of directors.
But a new identity can’t be created overnight. It demands a conscious effort to respect the past and create new practices by sharing decision making. For example, La Piana recommends that two-thirds of the new organization’s board members be drawn from the old organizations and that the “old” board members jointly select new board members. Additionally, he suggests that staff of the new organization continue relevant rituals from the old organizations, such as birthday celebrations or drinks after work, in addition to creating new practices that build an identity for the new organization and foster team building.
For all the effort and energy invested, mergers generally produce the desired results. Financial partners welcome the greater efficiency and tangible gains in organizational outcomes; organizations increase their visibility to the general public; constituents receive more service; and the organizations, generally, grow stronger and better equipped to face an uncertain future.