The Art of Mergers & Acquisitions in the Third Sector

In these troubled times for charities ans social enterprises, you might be asked by your CEO to give the thumbs up (or down) to a merger, a takeover of a smaller charity or acquisition by a much larger entity – for shorthand, an ‘M&A’.   As few of us see these every day we offer this checklist to help you arrive at your verdict

Your starting point must always be to ask why. What’s the strategic logic? Or, to put it another way, ‘how might 1 + 1 = 17?’  

Most M&A propositions are justified on one of three grounds

New capabilities. Here the M&A delivers pooled skills and resources to create higher-impact.  The mergers of CoderDojo and Code Club with the Raspberrypi Foundation were such examples, enabling Raspberrypi to achieve global reach in its network of coding clubs and providing a new distribution channel to complement its content creation capability.

Bigger market-share This is about growing a bigger beast that outscales it’s competitors and strengthens it’s hand.  The merger of Speaking Up and Advocacy Partners to create VoiceAbility put the #2 and #3 together to create a new #1 in the marketplace. This meant a more powerful entity, able to be bolder and more demanding in relation to commissioners.

So, does M&A significantly boost your capabilities, increase your market share or defend your position? We say significantly because the hassle and opportunity costs of merger, whether large or small, are always high (and often much higher than expected).  Or in other words, can 1 + 1 make 17? 

Survival This is a common ground in the third sector.  The balance sheet of the stronger party can stabilise the weaker, which is often running out of cash.  Condensing two sets of costs into one makes business sense, whilst a consolidation of assets preserves social mission.

Is the Third Sector Different?

Your second consideration should be the people.  In the business world, M&A is the norm. Company A buys Company B. The owners of Company B get some money and maybe a CEO job in Company A (though probably not). Company A then invests time and energy in Company B in pursuit of a return on the purchase-price.  The third sector isn’t so straightforward.  Money doesn’t change hands between owners, so the terms of the transaction matter more.

In our experience, the biggest obstacles to M&A in the third         sector are senior employees or trustees on one (or both) sides.  

For them, the merger can be a threat either to their income, role or status.  However, because such issues are not supposed to be part of due diligence they often don’t get talked about properly.

This is a mistake. The key to successful third sector M&A is to treat it like a commercial transaction.  There needs to be a proper deal for the main people involved – the CEOs, SMTs and Trustees – around jobs, money and continuing roles. Without acknowledging this, you end up in an M&A conversation that dodges some of the potential deal-stoppers like ‘who is CEO and Chair?’ or ‘what will be the name?’.

In the merger of Speaking Up and Advocacy Partners there was a deal: the CEO of Speaking Up (Craig Dearden-Phillips) was to stand down and would be compensated.  There was to be a new name.  The new Board would have a chair from Speaking Up.  The senior team would be picked on merit from across the two organisations. Without this the deal may not have flown.   

Success in M&A

Your third consideration should be your integration strategy.  There is a boring statistic that 80% of mergers fail.  It would be more accurate to say that M&A is almost guaranteed to fail if two organisations are not effectively integrated post-merger. 

Craig Dearden-Phillips MBE, and Craig Morley MBE, have worked as CEOs and advisers on third sector mergers and acquisitions. Join the authors at Social Club and discover Leadership Learning Sets

There are a number of ways to integrate post M&A.  The easiest is to bring a new organisation into your ‘group’ and, over a two-year period exploit the synergies both on the cost and offering side.   This makes for a ‘slow motion’ integration which minimises short-term risks but can mean the benefits are only felt over the medium term. 

The alternative is a quicker transition, with the merging entities brought immediately into one unit. However, this has an impact on everyone, including the acquirer, which can be under-estimated. Overall, insufficient investment in the merger leads to benefits being slower to materialise. This is where mergers tend to unravel.

You mitigate this risk by having a strong post-merger plan and CEO-accountable project-management around the integration. You really can’t throw enough at this in the first year.

It’s not just the practical stuff like jobs, systems and operations, it’s about culture too. People need to feel part of something new, to share the new mission and live the values. They need help through change – it’s a whole organisation effort to get this right. The effort involved means you often can’t do much else – the opportunity cost of an M&A is high.

Which brings us back to our first point. If M&A is your strategy of choice you must ensure it is ambitious enough to merit being your principal activity. M&A can be brilliant as a growth strategy, but it has to have an overwhelming strategic logic and to be executed with maximum effort by your board and SMT. Otherwise you might find yourself fighting on too many fronts, leading eventually to a failed, expensive M&A.