Successful Mergers: Two CEOs Talk Shop

For many years, and especially since the economic downturn reduced their grantmaking budgets, funders have been urging nonprofits to merge. Proponents of merger often cite duplication of effort among grantees and the presumed economic efficiencies that can be gained from having larger organizations. Neither assertion is well supported by evidence, and for those and other reasons mergers continue to be discussed far more than frequently than they are implemented.

Although the number of successful mergers remains modest, Meyer has seen an increase in mergers among our grantees since 2009. Two of the most successful recent examples took place in 2011, when Meyer grantees Community of Hope and N Street Village each merged with another organization.

Community of Hope, a 30-year-old nonprofit that provides health, housing, and education programs to low-income families in DC, merged with the Family Health and Birth Center, the only freestanding birth center in DC, in August 2011. N Street Village, the leading organization serving homeless women in DC, announced in November 2011 that it was incorporating Miriam’s House, a residential community for women living with HIV and AIDS, into its programs as part of an expansion of much-needed services for homeless women living with HIV/AIDS.

Both Community of Hope and N Street Village are relatively large, stable organizations that have been recognized for excellence in management and leadership. For each, the merger supported a long-term vision for increasing their impact and better fulfilling their mission. More than a year later, both organizations continue to thrive after successfully integrating the programs of their merger partner.

Meyer Senior Program Officer Karen FitzGerald interviewed Kelly Sweeney McShane, executive director of Community of Hope, and Schroeder Stribling, CEO of N Street Village, to learn what went well—and what was tricky—about merging.

Why did you decide to enter into a merger? How did the process unfold?

Kelly: It all started with a lunch! Cynthia Flynn, then general director of Family Health and Birth Center (FHBC), invited me to lunch in January 2011. FHBC was facing the potential end of its malpractice insurance coverage in September 2011 and was struggling financially with low reimbursement rates. As a Federally Qualified Health Center, Community of Hope (COH) has malpractice coverage under the federal government and increased reimbursement rates. Those benefits only kick in if all staff are employees of COH and are governed by a single, patient-majority board of directors. To make a merger happen, FHBC would basically need to dissolve.

After our first conversation, we drew up a concept paper with background information on each organization, pros and cons of merger, and next steps. The boards met together several times and Cynthia and I spent many hours doing due diligence and learning about each other’s organizations and cultures. COH assumed operations of FHBC in August 2011, including hiring all of FHBC’s staff and adding three board members to COH’s board. FHBC dissolved in December 2011. The entire process from first conversation to assuming operations was only eight months, which required an immense amount of work on all parts.

The deciding factor for both organizations was the commitment to our missions of serving low-income people in an underserved community and using this joining together as an opportunity to advance our missions while creating a model for financial sustainability. I am particularly pleased that we were able to expand primary care and keep a unique maternity service in the community.

Schroeder: For us, the idea of merger first emerged as part of a strategic planning process with the board and senior staff in 2010. One element of our four-part plan for mission-fulfillment and sustainability was to seek to grow through strategic partnerships.

Miriam’s House initially came to us seeking advice and support regarding an outdated program model that wasn’t adequately serving its clients and also disclosed a chronic resource-development challenge. Given the very strong mission-fit and positive chemistry between our two organizations, it occurred to me right away that we could make a successful merger that would strengthen our collective impact.

A new executive director, Sam Collins, had just replaced retired founder Carol Marsh. Major leadership change moments are a good opportunity for thinking about big shifts and Sam had a realistic analysis of the challenges he was facing as well as a personal instinct for creative problem-solving. We started gingerly by offering to provide some supplemental program support to Miriam’s House residents, but quickly progressed to candidly proposing a merger—a “partnership on steroids” as we called it. To their great credit, Sam and the other Miriam’s House leaders were quickly receptive and we began the long process of due diligence, including testing all assumptions and projecting out financials. We involved board members and pro bono legal staff right away, and laid out the tough questions up front: What happens to the executive director of Miriam’s House? What about the other staff? The board? What about the name of Miriam’s House?

For us, the entire process took about 10 months, and I too felt a great sense of relief and accomplishment—on behalf of both organizations—that we were able to preserve and strengthen all of the community resources involved.

Kelly: I do think it’s important to note that not every deal is a good deal, and that it takes a LOT of time to do a deal. So, it’s important not to just jump on the first person who approaches you or you approach, as it might not be a good fit.

I also echo the thought that it takes a very special executive director and board to basically put themselves out of business. The leadership must be very selfless and mission-focused, which is extremely commendable. And while there may be a sense of relief in “handing off” the organization, it still takes an immense amount of time and attention to detail to close down an organization. So, hats off to leadership of both FHBC and Miriam’s House!

What went well?

Kelly: A lot! Our board did a really good job at being very thoughtful and thorough. We hired a wonderful consultant, Jane Thompson, to be the project manager for the “deal.”We had weekly 30-minute check-in calls as we went through a long list of items, such as comparing employee benefits packages, talking to lawyers, analyzing financial statements, getting approval from the federal government to add FHBC to our scope of work, and updating contracts with the insurance companies that we bill for health services.

We got funding from the Meyer Foundation to develop a communications plan as well, and held two listening sessions with staff, patients, board members, volunteers, and supporters of both organizations.

It also helped to get financial support from other foundations such as the Consumer Health Foundation and Kaiser Permanente, and continued funding for general operations from the Cafritz Foundation, during the transition to help fund the costs of this transition, which took a lot of staff time.

We also tried to spend a lot of time with staff, including having a meeting with all FHBC staff and key COH staff to talk about our hopes and dreams, and fears.

One of my favorite activities was the orientation day we had to bring on 20 staff from FHBC. We started with some meditation, and then I presented on COH’s mission, vision, values, and strategic plan. We did some teambuilding, along with filling out new hire paperwork and going over the Employee Handbook. Everyone was given t-shirts with the new logo and FHBC’s name on it, and we memorialized the day with a group photo. I thought the day generated some really positive morale.

Schroeder: We have a lot in common with COH’s experience. I would put the positives into several buckets:

A recipient of the Washington Post Award for Excellence in Nonprofit Management, N Street Village was recognized by the Center for Nonprofit Advancement’s Board Leadership Award in 2011.

• Positive endorsements. Having “backing” from key constituents and supporters really mattered. Early on we were able to secure both funding and blessing from key funders (Meyer Foundation, Cohen Foundation, Cafritz Foundation and Kaiser Permanente of the Mid-Atlantic States), from our board and from some of our key friends and founders. This lent important credibility and momentum to our planning. I also spent a lot of time at the beginning contacting constituents and supporters to test the waters and secure their support. I also made sure to do ‘insider previews’ for all of those folks before the official news became public at the end of the process.
• Socializing and celebrating. We did a lot of gathering, greeting, socializing, processing and celebrating both during and after the process to make it ceremonial and to try to honor and preserve and promote the positive culture and morale that both organizations enjoyed. We held a breakfast for all staff and board at the start of the process, we held some serious discussion groups for staff leaders to tackle sensitive issues, and we held some staff and board and client celebrations at the end of the process—at both of our locations—complete with a healthy dose of line-dancing, which is the preferred method of celebrating around here.
• Procedural positives. We tasked senior staff member Tracy Cecil to be the project manager—she kept the trains moving on a tight schedule and sent weekly project updates to the whole working group of Miriam’s House and N Street Village staff leaders and board. We also recruited one of our board members, Peter Shields, to be the official “liaison” between the two boards. Peter is the Managing Partner at Wiley Rein and has a lot of experience with merger negotiation in the corporate world and he was an invaluable help in the process. He was able to represent our board in the negotiations and also take some sensitive staff elements (such as maintaining morale during the change and coping with staff sense of loss) off-line and into the board-to-board communication.

Early on we committed to bringing a legacy member from the Miriam’s House board onto the N Street Village board—Carolyn Arpin. Carolyn has a background in finance which was a great addition to our board skill sets and we got her involved in our board work even before the ink was dry. She was the financial expert on their board and so she worked closely with our CFO on all the financial testing that went into our due diligence.

We did a web announcement that we pushed out through social media channels on the day the merger was legally final. We filmed a short video of myself and the founders of Miriam’s House talking about the two organizations and what it meant to be joining forces—it was a feel-good piece that also aimed to educate the community.

What advice would you give to other executive directors contemplating a merger?

Kelly: Whether you are the “surviving entity” or the one doing the merging:

1. Mergers are a lot of work! Be sure you know why you are doing it and be realistic about the amount of your staff time it is going to take to make it successful.
2. Given #1, be sure you have buy-in and enthusiasm from the team who will be doing the work, along with the board of directors. Be honest about both the pros and the cons and have people really struggle through it so that the decision is informed.
3. Have as many champions as you can to keep everyone reminded why you are doing the merger when things get tough. And have a point person to keep the checklist of all the many details associated with the merger.
4. Communicate, communicate, communicate. It’s never enough.
5. It takes a year to really come out the other end. Celebrate the accomplishments and hang in there!

I think it’s important to be sure that the surviving entity has the infrastructure to undertake a merger, everything from doing payroll to paying bills to orienting new staff. If you are struggling in those areas, make sure you are adding capacity to take on the extra stress during the transition. It’s also good to have a bit of a financial cushion, or at least plan for some challenges in cash flow during a transition.

Schroeder: It would be hard to improve on Kelly’s list A few points of emphasis I would add:

Understand your rationale—and the expected upsides and downsides—and regularly review them. So much of the discussion in our sector around mergers and acquisitions has painted them as a solution for resource-risks and as a highway to cost-savings or “efficiencies,” mostly because of the impact of scaling. While “scaling” can have these positive effects, it can have immediate high costs in the short term and may also have hidden costs (monetary and non-monetary) that emerge over the long term. For example: infrastructure for IT, accounting, fundraising and HR may require improvements to support growth. And that precious and intangible thing we call “organizational culture,” which can be nurtured in a smaller organization, becomes more diffuse and harder to influence the larger we are.

Understand the opportunity cost that comes with planning for and implementing mergers. For example, during the months that we worked on the Miriam’s House and N Street Village merger, the hours that I spent on the related negotiations, planning, and board work were hours NOT spent on other fundraising and leadership activities. This was a calculated risk on our part, but a risk nonetheless.

I would underscore Kelly’s good point: hyper-communication is critical, with all stakeholders and interests groups in our organizations. There will always be someone who didn’t get the memo no matter how much we talk about it! I like the idea of directly exposing all kinds of folks to the plans as they develop, even those less likely to be supportive. Critical voices are necessary to surface key issues for discussion. And those who become supportive will feel excited to be “in on the action” and can help us make our experimentation successful.

Even given the caveats above, I think we should dream big and boldly about our social missions, and I believe we can best do so by innovation and experimentation. We won’t know what’s possible until we try. By joining forces with Miriam’s House we were able not only to reinforce the financial position of both organizations, but we have been able to expand HIV services to hundreds of women, AND we have opened the potential to add to our supportive housing inventory even further at more moderate cost that we could have otherwise. These are significant positive outcomes that will have a lasting impact for the people we exist to serve.

Karen FitzGerald is a Senior Program Officer at the Meyer Foundation, where she specializes in the Healthy Communities program area, which includes grants in health, access to essential services, and public policy. Before joining the Meyer Foundation staff in 1998, she worked for the Enterprise Community Investment, which syndicates Low-Income Housing Tax Credits to finance affordable rental housing throughout the country.