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Expected flurry of charity mergers fails to materialize

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The Great Recession failed to produce the wave of consolidation some not-for-profit observers expected a year ago.

Grant-makers believe there aren’t enough philanthropic dollars to support the number of charities, which has exploded in the past decade. They figured last year’s stock market crash, which zapped individual giving and endowment income, would force organizations to consolidate.

Thompson

“I’ve seen some efforts towards that,” said Indianapolis Foundation Trustee Milt Thompson. “Not quite what I was quite frankly hoping for and anticipating.”

Observers offer various explanations for the lack of mergers. Those include a lack of incentive for not-for-profit managers to merge their way out of a job. Staff and budget cuts also have left many not-for-profits without the manpower or time for due diligence.

One of the few transactions completed in central Indiana merged Dads Inc. into The Villages, a $22 million child and family-services organization.

Dads Inc. is a 4-year-old organization with just one employee. Although the merger was fairly straightforward, it took 10 months to complete and required $90,000 in foundation grants.

The Villages CEO Sharon Pierce said taking on Dads Inc. made sense because it helps fulfill a strategic goal of engaging fathers. The new Dads Inc. division may become self-supporting, but it won’t enhance The Villages’ bottom line.

“For us, it’s much more about mission,” Pierce said.

The Central Indiana Community Foundation, which funded Dads Inc. in the past, initiated the merger. Grants officer Roderick Wheeler said Dads Inc. ran out of cash, so he tried to help founder and Executive Director Chris Maples find a management-support organization.

Although Pierce was game, she said The Villages has its own budget worries. So the Indianapolis Foundation, which is part of CICF, and Nina Mason Pulliam Charitable Trust provided first-year funding.

Payne

Unlike in the business world, not-for-profit mergers don’t usually enrich top executives, CICF President Brian Payne said.

In business, he pointed out, “The losing CEO walks off with millions. In the not-for-profit world, the losing CEO walks off with unemployment.”

Two other not-for-profits have absorbed small groups working in the same vein. Shepherd Community Center completed a bevy of mergers in 2008 and early this year. All involved struggling community-service groups working in Shepherd’s targeted near-east and near-north neighborhoods.

In September, the Boone County YMCA became part of YMCA of Greater Indianapolis.

The harsh economy turned out to be an impediment instead of a catalyst for consolidation, several observers said

“It was my hope to [motivate] mergers and shared services,” United Way of Central Indiana CEO Ellen Annala said. “The fact is, we’ve been so buried because of basic needs in the community.”

United Way cut funding to agencies 10 percent and eliminated 12 of its own jobs this year. At the same time, it began overseeing a multimillion-dollar economic relief fund, as well as a federal stimulus grant for homelessness prevention.

Many charities are in the same day-to-day survival mode.

“A lot of organizations are just digging down to the core of what they have,” said Kris Kindelsperger, senior executive consultant at Johnson Grossnickle and Associates in Greenwood.

Surveys by the Boston-based consultant Bridgespan Group show not-for-profit managers gave mergers slightly less consideration as the year went on.

The portion who said they considered mergers or acquisitions fell from 20 percent in November 2008 to 19 percent a year later.

In contrast, tactics such as cutting overhead expenses, layoffs and internal reorganization gained favor. Bridgespan polled 800 not-for-profit leaders at periodic intervals over the past year. The most recent survey in November had 100 respondents.

Kindelsperger has been amazed by his clients’ resourcefulness. But he’s not sure how long not-for-profits can operate with bare-bones staffing and no pay increases.

“I don’t know whether those ultimately will be strategies for survival or prolonging the inevitable,” he said.

Thompson thinks mergers are a last resort, so they may lag the initial shock of the downturn.

“There’s a lot of ego, particularly when you’re talking about the non-profit entrepreneur, the ones that have founded an organization,” he said.

Annala said she hopes to more actively encourage agencies to merge, or simply share back-office functions, in 2010.

“It certainly is something the non-profit sector needs to do more of,” she said.

The number of registered U.S. charitable organizations has grown 58 percent since 1999, according to the National Center for Charitable Statistics. There are 997,136 organizations today.

Indiana saw similar growth. In the past 10 years, the number of registered charities rose 54 percent, from 14,265 to 22,020.

Not everyone subscribes to the notion that there are “too many charities.”

“In fact, I think some of that attitude is a bit of a ‘dog in the manger’ mentality, where the existing charities don’t want to see more competition from emerging charities,” said Beth Gazley, an assistant professor in philanthropy at IU’s School of Public and Environmental Affairs.

Charities often share resources and work together on behalf of clients, but in an informal way, said Gazley, who has studied collaboration.

She added that organizations do consider mergers, but may find various reasons not to follow through.

Payne at the Central Indiana Community Foundation agrees that mergers are not a simple solution.

“I get frustrated when people try to force them,” he said.•

 

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